Implied Growth Rate
Backs the Entry P/E formula out of the unknown growth rate: given a market P/E, exit P/E assumption, required return, and holding period, what EPS growth rate is the market pricing in?
When to use: Use as a sanity check. If the market is paying 30× and an 8% required return is assumed with a 20× exit, ask whether the implied growth rate is achievable. If it requires 25% growth for a decade, the price is demanding heroic execution.
Formula
Variables
| Symbol | Name | Description | Unit |
|---|---|---|---|
| ImpliedG | Implied Growth Rate | Earnings growth rate implied by the market price | % |
| PE | P/E Ratio | Price-to-earnings multiple | integer |
| ExitPE | Exit P/E Ratio | Expected price-to-earnings multiple at exit | integer |
| r | Required Return | Annual required rate of return as a decimal | % |
| n | Holding Period | Years held before exit | years |
Real-Life Examples
Example 1: 30× Stock, 20× Exit, 8% Required Return
Stock trades at 30× earnings. Assume exit at 20× in 10 years, required return 8%.
Given
Step-by-Step
The market is pricing in ~12.5% annual EPS growth for a decade just to deliver an 8% return — and then accepting a multiple compression to 20×. If you believe sustainable EPS growth is closer to 8-10%, the stock is overpriced relative to your view.
Frequently Asked Questions
PEG uses a single growth point estimate to gauge "is this fair?" The implied-growth formula inverts a full P/E framework — it tells you what growth rate would justify the current price given other assumptions. More work, but more rigorous.
The implied growth scales inversely with exit P/E. Higher exit P/E → lower implied growth needed; lower exit P/E → higher growth needed. Run multiple exit P/Es to bracket the implied-growth range your view supports.
When PE × (1+r)^n / ExitPE < 1 — meaning negative growth is implied. The current multiple is already low enough that even shrinking earnings would still meet the required return. Either the model is wrong or the market is pricing distress.