Implied Long-term Growth Rate Calculator

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Challenge the market price!

The essence of value investing is looking for stocks where the market price doesn't reflect the underlying value of a company. The basic idea is that over time, the market will recognize this value and the price will adjust. One of the best ways to do this is to evaluate the the implication of the market price. In other words, what will a company have to do to be worth the market price. Our Implied Growth rate calculator uses our most basic model, Model 101, to calculate the amount of growth that a company needs to achieve to be worth its current price in the market.

Why do we care about implied growth?

Why do we care about implied growth because one of the most common mistakes that investors make is to overvalue future (speculative) growth. Financial history is riddled with cases where a projected rosey future did not happen and investors suffered. Think AOL! The academic basis for this approach, and much of the thought behind the tool, is outlined in detail in Stephen H. Penman's book Accounting for Value. If you have more questions, please do not hesitate to contact us.

Note: Professor Penman has no official involvement in this site, but this site does offer a long-term growth rate calculator based on the concepts from his books.

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Model Inputs and Outputs

This is the most recent market price that we have for the a share of the company.
This is the annual return on your capital that YOU require to hold stock in the company. For very stable companies, this may be around 7% - 8%. For riskier companies, this could be much higher. The required return is used in the model to discount future company earnings, so that we can caluculate the value of those future earnings today.
Book Value Per Share This is the amount of money per share that have been invested in the company either by outside investors or by revinvesting company profits back into the company. A manufacturing company may have a relatively high value relative to its earnings because it may own a lot of factories or other capital equipment (i.e. manufacturing is capital intensive). On the other hand, a software company may have a low value because most of its "capital assets" are the results of research and development. Book value per share is often used as a proxy for what a company could be sold for if it were to be liquidated. However, this can vary greatly depending on the type of company.
Dividend Per Share This is the dividend that a company is expected to pay. This is important NOT because dividends create value. Rather, this is used in the model to adjust the amount of capital that is expected to be required over time.
This Year's Earnings Estimate This is the average of published earnings estimates for THIS ficscal year.
Next Year's Earnings Estimate This is the average of published earnings estimates for NEXT ficscal year.
This is the value that the model generates using the current book value, the annual dividend, the earnings estimates and YOUR required return for holding the company. If you have a higher required return, then this value will be lower because future earnings are riskier (and therefore not worth as much at the present time. Note: This value does not use the market price. This output can be used as a point of reference to challege the market price.
This is measure of the amount of growth that the company needs to achieve to be worth the price quoted in the market. NOTE: this is RESIDUAL EARNINGS growth. Residual earnings are earings beyond what you require for your use of capital. For example, say that you invest 100 dollars and require 10% return (i.e. 10 dollars per year). If after one year, the company has a profit of 10 dollars then he company has EARNINGS of 10 dollars. However, the company does not have any RESIDUAL earnings because you require 10 dollars in earnings for use of your capital. If instead the company earned 11 dollars. Then there is 1 dollars in RESIDUAL earings (e.g 11 in earnings - 10 required earnings = 1 in residual earnings). The Current Implied Long-term Growth Rate in Residual Earnings is the annual growth rate of these residual earnings. NOTE: the model uses the book value per share of equity as the measure of how much capital has been contributed NOT the amount that you pay for a share. Because of this, some companies will always have Residual Earnings. However, it is the CHANGE in residual earnings that adds or subtracts value. Generally, a common value for well-established companies (i.e. not high-growth start-ups) for this output is 2% - 4%. If it is well outside this range, then you may have a different required return than most of the other people in the market OR the market may be mispricing the share.