Implied Required Return
Inverts the Entry P/E formula to solve for the required return: given the market P/E, an exit P/E assumption, an expected growth rate, and a holding period, what return does the price imply if all assumptions are met?
When to use: Use to check whether a stock's implied return meets your hurdle rate. If implied return is below your required return, the market is too optimistic; above, the market may be offering a margin of safety.
Formula
Variables
| Symbol | Name | Description | Unit |
|---|---|---|---|
| ImpliedR | Implied Required Return | Required return 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 |
| g | Earnings Growth Rate | Expected annual EPS growth as a decimal | % |
| n | Holding Period | Years held before exit | years |
Real-Life Examples
Example 1: 25× Stock, 20× Exit, 10% Growth
Stock at 25× earnings; assume exit at 20× in 10 years and 10% EPS growth over that period.
Given
Step-by-Step
Implied annualized return is 7.6% — below a typical 10% equity hurdle. Either growth needs to come in stronger than 10%, the exit multiple needs to expand, or the price is too high for the assumed scenario.
Frequently Asked Questions
Forward-looking. It tells you what annualized return the current market price implies if your growth and exit P/E assumptions hold. To check a return you actually realized on a closed position, use the same formula with the price you paid as the P/E input.
It means even with growth and the assumed exit P/E, the price today is already so high that holding to that exit produces a loss. Sign of a meaningfully overpriced stock relative to the assumptions used.
This formula ignores dividends — pure price-appreciation return. For dividend payers, switch to the With Dividends variant, which compounds the dividend yield with the price-appreciation return rigorously.