PVGO Calculator

1. What is the PVGO Calculator?

Definition: The PVGO Calculator computes the Present Value of Growth Opportunities (PVGO), a financial metric that estimates the portion of a company’s share price attributable to future growth prospects. It also calculates the Earnings Per Share (EPS) as an intermediate step.

Purpose: It helps investors and analysts understand how much of a company’s current share price is driven by expectations of future growth versus its current earnings, aiding in investment decisions and company valuation.

2. How Does the Calculator Work?

The calculator uses the following formulas, as shown in the image above:

$ \text{EPS} = \frac{E}{N} $

$ \text{PVGO} = P - \frac{\text{EPS}}{k_e} $

Where:

$ \text{EPS} $: Earnings Per Share;
$ \text{PVGO} $: Present Value of Growth Opportunities;
$ E $: Earnings;
$ N $: Number of Shares Outstanding;
$ P $: Share Price;
$ k_e $: Cost of Equity (as a decimal, e.g., 10% = 0.10).

Steps:

Enter the earnings ($ E $), number of shares outstanding ($ N $), share price ($ P $), and cost of equity ($ k_e $, as a percentage).
Calculate the EPS by dividing earnings by the number of shares outstanding.
Calculate the no-growth value per share by dividing EPS by the cost of equity (as a decimal).
Calculate the PVGO by subtracting the no-growth value from the share price.
Display the results, formatted with 4 decimal places or in scientific notation if less than 0.001.

3. Importance of PVGO Calculation

Calculating PVGO is essential for:

Investment Decisions: A high PVGO indicates significant growth potential, suggesting the company should reinvest earnings rather than pay dividends, while a low or negative PVGO suggests distributing earnings to shareholders.
Company Valuation: Helps separate the value of current operations from future growth, providing a clearer picture of what drives the company’s market value.
Strategic Planning: Assists management in deciding whether to pursue growth opportunities or return capital to shareholders.

4. Using the Calculator

Example 1: Calculate the EPS and PVGO for Company Alpha with earnings of $1,000,000, 50,000 shares outstanding, a share price of $20.00, and a cost of equity of 10%:

Earnings ($ E $): $1,000,000;
Number of Shares Outstanding ($ N $): 50,000;
Share Price ($ P $): $20.00;
Cost of Equity ($ k_e $): 10% (0.10);
EPS: $ \frac{1000000}{50000} = 20.0000 $;
No-Growth Value per Share: $ \frac{20.0000}{0.10} = 200.0000 $;
PVGO: $ 20.00 - 200.00 = -180.0000 $.

Example 2: Calculate the EPS and PVGO for a company with earnings of $2,000,000, 100,000 shares outstanding, a share price of $50.00, and a cost of equity of 8%:

Earnings ($ E $): $2,000,000;
Number of Shares Outstanding ($ N $): 100,000;
Share Price ($ P $): $50.00;
Cost of Equity ($ k_e $): 8% (0.08);
EPS: $ \frac{2000000}{100000} = 20.0000 $;
No-Growth Value per Share: $ \frac{20.0000}{0.08} = 250.0000 $;
PVGO: $ 50.00 - 250.00 = -200.0000 $.

5. Frequently Asked Questions (FAQ)

Q: What does a negative PVGO mean?
A: A negative PVGO indicates that the market perceives the company’s growth opportunities as value-destroying. Reinvesting earnings may decrease the company’s value, so it might be better to distribute earnings as dividends.

Q: How does PVGO influence dividend policy?
A: A high PVGO suggests the company should reinvest earnings into growth opportunities to maximize shareholder value, while a low or negative PVGO suggests paying dividends instead.

Q: Why use a 1-year average share price for PVGO calculations?
A: Share prices can be volatile. Using a 1-year average share price provides a more stable estimate, reducing the impact of short-term market fluctuations on the PVGO calculation.