In my view, RDCFs are a useful tool to test against the implied consensus built into the share price. Therefore I try to reduce own assumptions to the extent possible by using consensus estimates as far out as possible - and if needed - adding a staging element to it (e.g. tapering growth, etc.).
That would give you an implied market expectation - I.e to justify the current price, the topline to must x% for x years, margins to grow x pp, etc. Based on that, you must evaluate if said expectations are too conservative/optimistic.
I absolutely love this approach! Reverse-engineering DCF gives you so much more flexibility compared to the traditional method. It flips the conventional idea of risk—usually tied to the hurdle rate—into a lens for exploring potential returns. For me, this opens up a whole new level of flexibility in the assumptions (and potential outcomes) investors can play with. I recently tried this method on a valuation of Edenred, and ever since, I’ve been a huge fan. It’s such a game-changer!
In my view, RDCFs are a useful tool to test against the implied consensus built into the share price. Therefore I try to reduce own assumptions to the extent possible by using consensus estimates as far out as possible - and if needed - adding a staging element to it (e.g. tapering growth, etc.).
That would give you an implied market expectation - I.e to justify the current price, the topline to must x% for x years, margins to grow x pp, etc. Based on that, you must evaluate if said expectations are too conservative/optimistic.
I absolutely love this approach! Reverse-engineering DCF gives you so much more flexibility compared to the traditional method. It flips the conventional idea of risk—usually tied to the hurdle rate—into a lens for exploring potential returns. For me, this opens up a whole new level of flexibility in the assumptions (and potential outcomes) investors can play with. I recently tried this method on a valuation of Edenred, and ever since, I’ve been a huge fan. It’s such a game-changer!
I completely agree, glad you liked it!
Good work! I'll dive in it asap.