Hong Life CalculatorsUnderstanding the PVGO calculator — concept and principle
The present value of growth opportunities (PVGO) splits a share price into two parts: what the current earnings are worth if the company never grew, and what the market is paying for expected growth. Investors use it to see how much of a valuation rests on future growth.
How it is calculated
- No-growth value = EPS1 ÷ r, a perpetuity of next year's earnings at the required return r.
- PVGO = P0 − EPS1 ÷ r.
- Share of the price from growth = PVGO ÷ P0.
- Forward P/E = P0 ÷ EPS1; no-growth P/E = 1 ÷ r; earnings yield = EPS1 ÷ P0.
The principle
If a company paid out all its earnings and never reinvested, its earnings would stay flat, and each share would be worth a level perpetuity: EPS1 ÷ r. Anything investors pay above that must reflect the value they expect from reinvesting earnings at returns above r. Growth only creates value when reinvested earnings earn more than the cost of equity; growth funded at returns equal to r adds nothing. A negative PVGO means the price is below the no-growth value.
Worked example
Default inputs (textbook case): share price 54.50 USD, expected EPS 2.18 USD, required return 10%.
- No-growth value = 2.18 ÷ 0.10 = 21.80 USD.
- PVGO = 54.50 − 21.80 = 32.70 USD.
- Share of the price from growth = 32.70 ÷ 54.50 = 60%.
- Forward P/E = 54.50 ÷ 2.18 = 25; no-growth P/E = 1 ÷ 0.10 = 10.
- Earnings yield = 2.18 ÷ 54.50 = 4%.
| Share price | PVGO (present value of growth opportunities) |
|---|---|
| 13.6 | -$8.18 |
| 27.2 | $5.45 |
| 40.9 | $19.08 |
| 54.5 | $32.70 |
| 68.1 | $46.33 |
| 81.8 | $59.95 |
| 109 | $87.20 |
How to read the result
A large PVGO share means the price depends heavily on growth expectations; if growth disappoints, the price can fall sharply. Mature, stable companies usually have a small PVGO; fast-growing firms have a large one. Compare the forward P/E with the no-growth P/E: the gap is the market's premium for growth.
Common mistakes
- Using trailing (last year's) EPS instead of next year's.
- Choosing a required return that does not reflect the stock's risk.
- Treating PVGO as precise; small changes in r change it a lot.
- Assuming high PVGO means a stock is overvalued; it may be justified.
Frequently asked questions
What does PVGO tell you?
How much of the share price reflects expected growth rather than current earnings.
Can PVGO be negative?
Yes, if the price is below EPS ÷ r, implying the market expects value-destroying reinvestment or the inputs are off.
How is PVGO related to the P/E ratio?
P/E = 1 ÷ r + PVGO ÷ EPS1, so higher PVGO means a higher P/E.
Sources: Bodie, Kane & Marcus, Investments (equity valuation, present value of growth opportunities) · Brealey, Myers & Allen, Principles of Corporate Finance (valuing common stocks)