What this calculator does
Any share price can be split in two: what the current earnings alone are worth if they never grow, and everything else. That everything else is the present value of growth opportunities, and it is the part that depends on the future going well.
The split is revealing. A stock earning $4.00 a share at a 10 per cent required return is worth $40 on its current earnings alone. At $60 a share, a third of the price is a bet on growth; at $80, half of it is.
The formula
The no-growth value is earnings per share divided by the required return, which values the current earnings as a perpetuity. PVGO is whatever the market price exceeds that by.
| Term | Meaning |
|---|---|
| No-growth value | Current earnings capitalised forever at the required return. |
| PVGO | The remainder of the price, attributable to expected future growth. |
| Required return | The cost of equity, often estimated with CAPM. |
The inputs explained
| Field | What to enter |
|---|---|
| Current share price ($) | The current share price. |
| Earnings per share ($) | Earnings per share over the last twelve months. |
| Cost of equity (required return) (%) | The cost of equity, as a percentage. |
When to use it
Assessing how much of a price is speculation
A large PVGO share means most of the value rests on growth that has not happened yet.
Comparing a value stock with a growth stock
The split makes the difference between the two explicit rather than a matter of impression.
Sanity-checking a high multiple
If PVGO is 70 per cent of the price, the growth implied should be something you can actually name.
Worked examples
Every figure in the tables below is produced by this page’s own calculator at build time, so the numbers and the tool always agree. Select any row to load that scenario.
How much of each price is a bet on growth?
The same earnings at three share prices.
Questions
Can PVGO be negative?
Yes, and it is worth noticing when it happens. A negative figure means the market values the company below its current earnings capitalised, which implies an expectation that earnings will shrink or that capital is being invested badly.
Why capitalise earnings as a perpetuity?
Because the no-growth case assumes the company pays out all earnings and neither grows nor shrinks. A level perpetuity is exactly the right valuation for that assumption.
Does a high PVGO mean a stock is overvalued?
Not by itself. A genuinely fast-growing company should have a large PVGO. It means the price depends on growth being delivered, which is a statement about where the risk sits rather than about value.
How sensitive is it to the required return?
Very. The no-growth value is earnings divided by that rate, so a change from 10 to 8 per cent lifts it by a quarter and reduces PVGO correspondingly. The assumed cost of equity does a lot of work here.
For estimating the required return, see the CAPM calculator. For a dividend-based valuation, see the dividend discount model calculator.