Valuation, Value Investing

On Projecting Earnings using Historical Growth Rates

So from my thoughts in my earlier two posts on projecting earnings, here and here, I was thinking further about whether it is reasonable to project earnings using historical growth rates.

The answer is yes,  but with 3 caveats:

  1. You are making an implicit assumption that the payout ratio and the ROX will continue to remain the same as historical numbers.
  2. Also, typically by historical earnings growth here, the historical earnings are the raw earnings where the maintenance and growth portions are not separated (due to the difficulty in separating the two portions unless you are a company insider).
  3. Due to the problem with the point 2 above, it is best to only do this for stable companies that has been operating for a long time, as opposed to companies just starting out.


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