You will be able to solve for the growth or margin the current share price implies.
Marcus's DCF says Larkspur is worth about S$1.80 a share, and it trades at S$1.60. The natural conclusion is that the market is wrong by 12%. A more useful question is the reverse one. Instead of asking what the company is worth on his assumptions, ask what assumptions the market's price already contains, and then whether you believe them.
Figures are made up. Company figures are in S$ millions unless stated.
A reverse DCF uses the same model, run backwards. You set value per share equal to today's price and solve for the input that makes it true, usually revenue growth or margin. Everything else stays at your base case.
For Larkspur, a price of S$1.60 on 300 million shares means equity worth 480. Add net debt of 20, and the market is valuing the operating business at an enterprise value of 500. Marcus's base case gives about 558.6. So what growth, with everything else unchanged, produces 500?
To keep it to one number, replace the five yearly growth rates in the Inputs tab with a single rate applied to every forecast year, and leave margin at 13.5%, capital spending and working capital at their ratios, the discount rate at 9% and long-term growth at 2%, and solve for that one rate.
You don't need to solve this by trial and error. Excel and Google Sheets both have a tool for it. In Excel it's Goal Seek, under What-If Analysis. In Google Sheets, the Goal Seek add-on does the same job.
Point it at the value per share cell, tell it to reach 1.60, and let it change the single growth rate cell. It tries values until the answer matches. Then copy the result somewhere safe before you change anything else, because the next run will overwrite it.
For Larkspur, the answer is about 1% a year. At S$1.60, the market is pricing in revenue growth of roughly 1% a year for five years, at a steady 13.5% margin, followed by 2% a year for ever.
You can solve for other inputs too. Holding Marcus's base growth path, from 8% fading to 3%, Goal Seek finds that a price of S$1.60 implies an operating margin of about 12.5% in every year, against his 13.5%. Same price, two readings: either growth much slower than Marcus expects, or margins a point lower.
Now put the implied figure beside the record. Larkspur's revenue grew from 300 in FY1 to 400 in FY5, about 7.5% a year compounded, through one downturn. Its operating margin averaged about 13.4%.
So the price implies growth well below what the company has achieved, or margins slightly below its average, which is the opposite of what the exercise usually turns up. Reverse DCFs on fashionable stocks often show prices that need growth of 20% or more for a decade, far above anything the company has done. When the implied growth is far above history, the price assumes a great deal, and any disappointment hurts. When it's below history, as here, the price assumes little, and the question becomes why the market is so cautious.
There are always candidate reasons. For Larkspur, two stand out from the reading log in lesson 6.8, Build an annual report reading log for one company. The market may expect a downturn in chip equipment spending, which would hit a cyclical supplier hard. And it may be pricing the risk that one of the two customers who make up 62% of revenue moves part of its orders to the second supplier it's qualifying.
Before the reverse DCF, Marcus's view was "Larkspur looks cheap". That's hard to act on, and hard to test. After it, the view is specific: "The price assumes about 1% growth a year. I expect more, because customer guidance points to growth and Larkspur's history is about 7.5%. I'm wrong if a big customer moves meaningful volume to its second supplier, or if the next downturn arrives within two years."
That sentence tells him exactly what to read for in the next results announcement and the next customer guidance. It also tells him what would make the market right, which is the information that stops him from holding on out of pride if the story turns.
It doesn't tell him to buy. A price that assumes little can still be too high if the cautious case comes true, and lesson 8.6, Sensitivity tables and scenarios instead of one target price, shows how to see that range.
For the activity, run a reverse DCF on your company at today's share price, solve for the revenue growth it implies, and write that figure next to the company's actual growth over the past five years.
Run a reverse DCF at today's share price and write the revenue growth it implies next to the company's past five-year growth.
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