Sorry to say I’m not familiar with this way of calculation. I prefer to keep things simple. I look at it this way- finally what matters to the investor is the appreciation in stock price (and to some extent dividend yield), not the growth in earnings or free cash or anything else. Stock price is decided by 2 factors – earnings and perception.
Stock price = PE x EPS
Like I demonstrated in the earlier example, earnings can grow at 30% CAGR but stock returns can be 20%CAGR or less if the starting valuation is too high. PE is decided by the demand for the stock. Demand depends on the perception of the company in the market. It is impossible to accurately project this at a distant point in time. All we can do is bake in some sort of margin of safety in our estimates and hope for the best.
Just trying to understand the above example. By EV yield, do you mean increase in cash and cash equivalent over time? Also, maybe they are calculating the possible returns assuming valuation remains the same. In my opinion, that’s a dangerous assumption to make if starting valuation is very high compared to historical and sectoral average.
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