Reverse Discounted Cash Flow (RDFC) Analysis Process

Article of the week

Dave Ahern: How to value companies quickly with the reverse DCF

Core Ideas

1) Input: Gather input data (total current free cash flow, diluted shares outstanding, historical and predicted growth rates) from an online data aggregator such as FinChat.io (or Yahoo Finance, TIKR). Select an appropriate discount rate (expected rate of return) commensurate with the level of uncertainty associated with the growth forecast.

2) Iteration: Construct a discounted cash flow (DCF) model. Run it with the historical growth rate. Iteratively adjust the growth rate until the computed intrinsic value matches the current stock price.

3) Assessment: If the computed growth rate is below the historical and predicted growth rates, the stock is undervalued.