What the price is already assuming

By the end of this lesson

Why a rupee next year is worth less than a rupee today, and how to price that
How a DCF works, in four steps, without the spreadsheet
Reverse DCF — the far more useful direction to run it

Picture this

Would you rather have ₹1 lakh today or in five years?

Today, obviously. Because ₹1 lakh today can sit in a fixed deposit at 7% and become about ₹1.4 lakh in five years. Waiting costs you.

So ₹1 lakh received five years from now is worth roughly ₹71,000 today. That's not an opinion — it's the arithmetic of what you'd have to put aside now to end up with ₹1 lakh then.

That's discounting. A DCF does this to every rupee a business will earn, for as far ahead as you can reasonably see, and adds them all up. That total is the business's intrinsic value.

Present value of a future cash flow

PV = Future cash flow ÷ (1 + r) ^ n

r: the discount rate — the return you require for taking this risk
n: how many years away the cash flow is

For Indian equities a discount rate of roughly 11–14% is a reasonable range — higher for riskier or smaller businesses. The rate is a judgement, and small changes to it move the answer a lot.

A DCF in four steps

1Forecast free cash flow for the next five to ten years. This is where nearly all the error lives — you are predicting the future of a business.
2Discount each year back to today using your required rate.
3Estimate a terminal value — everything beyond the forecast window, usually valued as a perpetuity growing at a low, sustainable rate (2–5%).
4Add it all up, subtract net debt, and divide by the share count to get a per-share value.

Worked exampleA deliberately simple DCF

A company generating ₹100 Cr of free cash flow, growing 10% a year for five years, then 4% forever. Discount rate 12%.

Year 1 FCF ₹110 Cr: PV ₹98 Cr
Year 2 FCF ₹121 Cr: PV ₹96 Cr
Year 3 FCF ₹133 Cr: PV ₹95 Cr
Year 4 FCF ₹146 Cr: PV ₹93 Cr
Year 5 FCF ₹161 Cr: PV ₹91 Cr

Sum of years 1–5 present values = ₹473 Cr

Terminal value = 161 × 1.04 / (0.12 − 0.04) = ₹2,093 Cr

Discounted to today: 2093 / 1.12^5 = ₹1,188 Cr

Enterprise value = 473 + 1188 = ₹1,661 Cr

Less net debt of ₹200 Cr → equity value = ₹1,461 Cr

So → Notice something uncomfortable: ₹1,188 Cr of the ₹1,661 Cr — over 70% — is terminal value. Most of a DCF's answer comes from a single assumption about the distant future. That's the honest weakness of the method.

Where people lose money

A DCF is a machine for confirming what you already believe

Change growth from 10% to 13% and the discount rate from 12% to 11%, and the same company's value can rise 40%. Nothing about the business changed — you changed two guesses.

This makes DCF trivially easy to reverse-engineer. Decide the answer you want, then adjust the assumptions until the model produces it. It happens constantly, often unconsciously, and the output carries an air of precision it hasn't earned.

Never quote a DCF as a single number. Run it at pessimistic, base and optimistic assumptions and treat the spread as the answer.

Reverse DCF — the version worth your time

Here's the insight that makes all of this practical. Instead of forecasting the future and computing a value, take today's market price as given and solve for the growth rate that would justify it. Then ask one question: is that growth plausible?

The one thing

Forecasting the future is hard. Judging whether somebody else's forecast is plausible is much easier — and reverse DCF converts the first problem into the second.

Worked exampleWhat is this price already assuming?

A company at ₹12,000 Cr market cap generating ₹300 Cr of free cash flow. Discount at 12%, terminal growth 4%.

Market cap: ₹12,000 Cr
Current free cash flow: ₹300 Cr
Implied FCF growth needed, 10 years: ≈ 19% a year

For the DCF to output ₹12,000 Cr, FCF must grow ~19% annually for a decade,

then settle at 4% forever.

That means FCF rising from ₹300 Cr to roughly ₹1,700 Cr by year 10.

The question is no longer 'what is it worth?' but:

'Can this company grow cash flow nearly 6× in ten years?'

So → Now you have a testable question instead of a forecast. Has this company grown at 19% before? Is its market big enough? Does it have the capacity and the moat? If the answer is clearly no, the price is assuming something that isn't going to happen — and you know it without predicting anything.

Reading an implied growth rate

Under 8%
How to treat it: Modest expectations. Even ordinary performance may exceed them.
8–15%
How to treat it: Reasonable for a good business with a real runway.
15–25%
How to treat it: Demanding. Needs a large market and a proven ability to compound.
Above 25% for a decade
How to treat it: Very few businesses in history have done this. Treat with deep scepticism.

Price implies	How to treat it
Under 8%	Modest expectations. Even ordinary performance may exceed them.
8–15%	Reasonable for a good business with a real runway.
15–25%	Demanding. Needs a large market and a proven ability to compound.
Above 25% for a decade	Very few businesses in history have done this. Treat with deep scepticism.

Cross-check against history: what has this company actually compounded at over the last ten years? If the price requires 22% and the company has delivered 11%, the burden of proof is enormous.

Worth knowing

Where DCF genuinely works — and where it doesn't

Works well: mature, predictable, cash-generative businesses with stable margins — consumer staples, established IT services, utilities with regulated returns.

Works badly: cyclicals (which cash flow are you forecasting?), early-stage companies (no cash flow yet), banks (cash flow means something different when lending is the business), and anything facing technological disruption.

For those, fall back on the multiples from the previous lesson and on judgement about the business. A precise-looking model applied to an unpredictable business is worse than no model — it manufactures false confidence.

How to actually use this

1Take current free cash flow (or normalised earnings if FCF is lumpy — average three years).
2Take the market cap as given.
3Solve for the growth rate that reconciles the two, at a 12% discount and a modest terminal rate. Any spreadsheet or online reverse-DCF tool will do it.
4Compare that implied rate against the company's actual ten-year record and the size of its market.
5Decide whether the market's assumption is conservative, fair, or fantasy. That is your valuation judgement.

See it live · Every fundamental report here runs a reverse DCF and states the growth rate today's price is implying — so you can judge the assumption instead of building the model.

See implied growth →

In one screen

1A rupee later is worth less than a rupee now; discounting prices that difference.
2A DCF sums discounted future cash flows — and typically 60–75% of the answer sits in terminal value.
3Small changes to growth and discount rate swing the output enormously, so always work in ranges.
4Reverse DCF is the practical form: solve for the growth the price already assumes, then judge whether it's plausible.

Check yourself

Nothing is scored or stored — the explanation after each answer is the point.

1/2

A reverse DCF shows the current price implies 24% annual free-cash-flow growth for ten years. The company has compounded at 9% over the past decade. What does this tell you?

2/2

In a typical DCF, roughly how much of the total value comes from terminal value?

Next lesson →

A bank is not an FMCG

← Previous

Why cheap is sometimes the most expensive

← All lessons