Reverse DCF: implied FCF growth

Interpretation

The annual free-cash-flow growth rate the current market cap silently assumes, solved from a standard discounted-cash-flow model.

Formula

Solve for g such that: sum of FCF × (1+g)^t ÷ 1.10^t over t = 1…10, plus a terminal value at 2.5% perpetual growth, equals today's market cap

Why it matters

Instead of forecasting cash flows and arguing about fair value, this runs the DCF backwards: the price is taken as given, and the model extracts the growth expectation embedded in it. That converts an unanswerable question (what is this worth?) into an answerable one: is it plausible that this company grows free cash flow at the implied rate for a decade? You can check plausibility directly against the company's own 5- and 10-year FCF history. The approach follows Rappaport and Mauboussin's Expectations Investing.

What good looks like

Implied growth well below the company's demonstrated FCF growth suggests low expectations and potential upside if the past merely continues. Implied growth far above history — say 15% implied against 6% achieved — means you are underwriting an acceleration that needs a specific, articulable reason. Implied growth near zero or negative for a stable business is where bargains live. Assumptions: 10% discount rate, 2.5% terminal growth, 10-year horizon.

Caveats

The output is only as meaningful as the base FCF: a temporarily depressed or inflated latest-year FCF shifts the implied rate substantially. The fixed 10% discount rate is a convention, not a market rate — in low-rate periods it is conservative, in high-rate periods generous. Undefined for companies with negative FCF, and the solver only searches between −50% and +100% growth.