Priced · InWhat the Stock Price Assumes
Your assumptions
Reading the price backwards
A company is worth the cash it will hand its owners over time, discounted back to today. Instead of guessing that future and calculating a “fair value”, this page starts from the price the market is paying and solves for the growth that price needs. Then you judge whether that growth is likely.
The number
The yearly growth in free cash flow, for the forecast years, that makes the cash flows worth exactly today’s company value at your discount rate.
Compare it
Hold it against what the company actually delivered: free cash flow and sales growth over the last 3 and 5 years are shown next to it.
Cheap stocks did better
Companies with the highest free cash flow for their price (the top 10% each April, 2014 to 2025) beat other stocks of similar trading size by 5.7% a year on average and in 8 of 12 years. Twelve years is too few to be statistically sure.
Limits
Small changes in the discount rate move the answer a lot, and one odd year of cash flow can skew it. It does not fit banks or insurers, whose cash flows work differently.
The exact method
- Company value
- Market value (price times shares outstanding) plus total debt minus cash and short-term investments, from the latest SEC filings.
- Free cash flow
- Operating cash flow minus capital spending over the last 12 months. With “count stock pay as a cost” on, stock-based pay is also taken off, because new shares paid to staff dilute owners just as cash pay would cost them.
- The model
- Free cash flow grows at a constant rate g for the forecast years, then at the long-run rate forever (a Gordon growth terminal value). All of it is discounted at the discount rate. g is solved so the total equals company value.
- Negative cash flow
- When free cash flow is below zero, the page solves for the sales growth needed instead, assuming free cash flow reaches the margin shown (the company’s best margin of the last five years, or 10%, whichever is higher) by the end of the forecast.
- Your guess
- Runs the same model with your growth rate and gives the value per share it implies, against today’s price.
- The test
- Each April from 2014 to 2025, US stocks priced $5 or more, trading $1 million a day and worth at least $300 million were ranked by last year’s free cash flow divided by market value. The top 10% was compared with all stocks of similar trading size over the next 12 months. Free price histories leave out delisted companies.
Good to know. This is a calculator for thinking about valuation, not a price target or a recommendation to buy or sell.
For education only. Data comes from SEC filings and third-party price sources and may be delayed or wrong. Past patterns do not predict future results, and nothing here is investment advice or a recommendation to buy, sell or hold anything. See the Terms and Disclaimer.