The Analyst’s Course · Valuation & DCF
Projecting Free Cash Flow — Where Models Go to Lie
The bridge from revenue to FCF
FCF = EBIT×(1−tax) + D&A − capex − Δworking capital. Each stage adds a judgment: revenue growth (demand), margins (competitive position), reinvestment (how much of profit must be plowed back to sustain growth), and working capital (growth consumes cash in receivables and inventory). DCF models die in step three: analysts project high growth without the reinvestment it requires, creating FCF that could only exist if growth were free.
The fade
No company compounds at 20% forever — competitive entry erodes excess returns. The fade linearly ramps growth down toward the economy's nominal rate by the end of the explicit horizon. The panel implements exactly this (growth → fade-to over 5 years). A useful benchmark: nominal GDP (~4–5%) is the ceiling for a mature company's perpetual growth; fade-to values above it implicitly claim the company becomes the economy.
The optimism bias, documented
Analyst 5-year growth projections have historically overstated realized growth by roughly a factor of two (McKinsey and academic studies agree). IPO prospectuses are worse: the S-1 is a marketing document. The defense is structural, not heroic: (1) start from actual filed FCF, not story-adjusted numbers; (2) fade aggressively; (3) let the sensitivity grid show what each assumption is worth; (4) reverse-DCF as the final sanity check (lesson 7).
FCF = EBIT·(1−t) + D&A − Capex − ΔWC
Free cash flow bridge — The panel reads FCF directly from filed cash-flow statements (CFO + capex) — never from adjusted company metrics.
WeWork S-1, 2019 — the fake fade
WeWork's 2019 S-1 projected essentially infinite growth with margins expanding "as we scale," on losses exceeding $1B/yr. The document is now the canonical case study in why fade curves must be paid for with reinvestment assumptions — community-adjusted EBITDA (lesson 6) and a fade that never faded. The IPO collapsed at a $47B peak private valuation → ~$8B IPO → bankruptcy by 2023. Nothing in the model arithmetic was complicated; the assumptions were simply unfalsifiable by design.
What you'll practise
A model projects 25% growth for 10 years with no reinvestment needs. The immediate red flag?
3 graded checkpoints · certification exam at the end of the track
Sources
Damodaran (ERP data); Mauboussin, ATKM; McKinsey Valuation; IPO prospectuses (SEC S-1 filings)
Learn content is for education only — not individualized financial advice, a recommendation, or a solicitation to buy or sell any security. Options involve substantial risk. Examples are simplified and historical patterns never guarantee future results.