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PE ratio indicates in how many years one can double their return. But it doesn't account for earnings growth.

Say a company's PE is 20 it's not necessary that earnings have to be stagnant for next 20 years, meaning one could double their return earlier than 20 years.

Is there any measure that takes average of last 3/5 years earnings and adjusts pe to arrive at estimated period to double the investment considering the growth of the companies?

I've come acroos peg ratio, but I fail to understand how It can be used to calculate no of years to double the return?

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    Where did you get the idea that PE indicates how many years to double your return? This is not accurate. It is the number of years of earnings it would take to equal the total market cap of the company (total of all shares at the current price). PE tells you nothing about ROI
    – JohnFx
    Feb 5, 2022 at 15:56
  • Isn't that the same? If ratio of market price to earnings remain the same, won't the stock price after PE years would have doubled?
    – Cybermonk
    Feb 5, 2022 at 17:49
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    There is no direct correlation between the future stock price and the current PE ratio. There are stocks with a PE less than 1. If so I'd be a trillionaire by now by doubling my money reliably by pouring money into these stocks and getting a 100% return in less than a year.
    – JohnFx
    Feb 5, 2022 at 21:16
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    I think you're assuming that the "earnings" in the formula are your earnings, not the company's. As a shareholder, you do not receive the company's earnings - only what they choose to distribute to you.
    – D Stanley
    Feb 6, 2022 at 2:14
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    @cybermonk - That's a different question and chat isn't for extended discussion. Feel free to post that as a new question.
    – JohnFx
    Feb 7, 2022 at 18:44

1 Answer 1

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No, it is not possible because the current price and earnings do not have such a direct causal relationship with the ROI for you as an investor in that company.

Certainly it is true that a company with growing earnings is very likely to experience growth in stock price, and maybe in dividends. However, that is not guaranteed or even something that could be predicted using the P/E or PEG with any degree of accuracy.

In the end your return is mostly going to be based on the stock price at a future point in time. Stock prices are driven as much by market sentiment as the financial fundamentals. It is entirely possible for a company to double earnings only for the stock price to be flat or even drop.

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  • Thanks a lot for your time and effort to clarify this. Hope this will be useful for others as well.
    – Cybermonk
    Feb 8, 2022 at 5:41

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