Abstract
Growth is a difficult concept to pin down. It represents an exponential progression but is often expressed as a perpetuity calculation (a ratio) for the sake of simplicity. For a more accurate calculation, the math quickly gets a bit complex, because one has to deal with intricate, nonlinear relationships admitting of no shortcuts. Even economic earnings growth obfuscates some important issues behind the scenes that cannot be ignored by investment analysts. How the company grows its profit line is always at least as important as the rate at which it is growing it. And, as a general rule, the level of cash return is a significantly more important variable than the growth in net assets. This chapter discusses the relative importance of what an investor thinks against what the market prices and offers a quantitative framework for measuring how much growth expectations matter in the pricing mechanism.
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