Great article! In my opinion, reverse DCF is a method that's used not often enough by investors. Most of them prefer using "regular" DCF, without really understanding the consequences and assumptions that underly this model.
This Solver allows you to calculate the implied growth rate immediately, rather than adjusting it manually to equal the current stock price, so it might save you some time!
Great article. In my opinion adding back growth capex is something that i Will do but with a grain of salt and just to give me a pulse of it, because using depreciation as a proxy for Maintenance capex is in some manner a estimation with a large probability of error, i think the pool of companies that overestimate the depreciation schedule is huge, because they dont count with the rapid advance in Technology, and the rise of inflation. In than is the question of the capitalized portion of intangibles, like R&D and SG&A. I prefer to leave the capitalized investments of the equation and have a more conservative aproach
Agree with you on the D&A portion. Sometimes companies provide more details in the footnotes, but not always. It is definitely good to leave growth Capex out to be conservative
Great article. I understand the idea behind adding back growth capex, but growth capex is necessary to grow. Now, in the example, you're assuming free cash flow to grow by 10% annually without actually making investments necessary to grow. Just something to think about in my opinion
The reason behind adding back growth Capex is because Capex is not a recurring expense, Unlike maintenance Capex, which is necessary to keep current operations running, growth Capex represents investments in new assets or expanding operations, which may not be recurring.
I think adding back growth Capex allows us to see the cash flow a company would be generating if it weren't making these investments, highlighting the company's potential to generate cash from existing assets.
For example, Google's growth Capex increased by 60% from FY23 to FY24, this is due due to AI. Which is probably not a long term recurring reinvestment.
Great article! In my opinion, reverse DCF is a method that's used not often enough by investors. Most of them prefer using "regular" DCF, without really understanding the consequences and assumptions that underly this model.
If I could give you one tip, Excel provides a "Solver" (link to setup guide: https://support.microsoft.com/en-us/office/define-and-solve-a-problem-by-using-solver-5d1a388f-079d-43ac-a7eb-f63e45925040).
This Solver allows you to calculate the implied growth rate immediately, rather than adjusting it manually to equal the current stock price, so it might save you some time!
Yea - I built the "Solver" and removed it. I want to be able to adjust the growth rate so I can see the upside/downside potential.
Oh okay, so you use it to simulate multiple scenarios then as well?
That is correct.
Great article. In my opinion adding back growth capex is something that i Will do but with a grain of salt and just to give me a pulse of it, because using depreciation as a proxy for Maintenance capex is in some manner a estimation with a large probability of error, i think the pool of companies that overestimate the depreciation schedule is huge, because they dont count with the rapid advance in Technology, and the rise of inflation. In than is the question of the capitalized portion of intangibles, like R&D and SG&A. I prefer to leave the capitalized investments of the equation and have a more conservative aproach
Agree with you on the D&A portion. Sometimes companies provide more details in the footnotes, but not always. It is definitely good to leave growth Capex out to be conservative
Great article. I understand the idea behind adding back growth capex, but growth capex is necessary to grow. Now, in the example, you're assuming free cash flow to grow by 10% annually without actually making investments necessary to grow. Just something to think about in my opinion
Hey Summit,
The reason behind adding back growth Capex is because Capex is not a recurring expense, Unlike maintenance Capex, which is necessary to keep current operations running, growth Capex represents investments in new assets or expanding operations, which may not be recurring.
I think adding back growth Capex allows us to see the cash flow a company would be generating if it weren't making these investments, highlighting the company's potential to generate cash from existing assets.
For example, Google's growth Capex increased by 60% from FY23 to FY24, this is due due to AI. Which is probably not a long term recurring reinvestment.
Hope that is clear. Thanks!
If can't forward, how to reverse?
If can forward, why is reversal needed?