- A stock’s valuation can be heavily influenced by future growth expectations.
- As a company generates positive earnings and retains these earnings, its book value of equity increases; however, in order for the positive retained earnings to create wealth for investors, the company’s return on equity must exceed its cost of equity.
- In theory, when a company sees no attractive growth opportunities, it should payout all earnings as dividends (yeah right, like corporate executives are going to do that!).
- PVGO allows analysts to calculate how much growth opportunities contribute to a company’s current share price.
PVGO = Price0 - (Earnings current period / rce)
If a company has a stock price of $75 and the PVGO calculation is $50, then growth opportunities contributes 2/3rds of the share valuation.