The starting inputs
Use an earnings-per-share figure and a reference share price with the same currency and share basis. Distinguish reported earnings from an estimate, and check for stock splits or changes in the number of shares. A stale or mismatched reference price can make an otherwise correct calculation misleading.
Project earnings, then apply a multiple
If E₀ is starting EPS, g is annual EPS growth and n is the horizon in years, projected EPS is Eₙ = E₀ × (1 + g)ⁿ. With an assumed future P/E multiple M, modeled future price is Pₙ = Eₙ × M. A higher multiple can raise the result even without better business performance.
Translate the result into an annualized price return
For a positive reference price P₀ and positive modeled future price Pₙ, annualized price return is (Pₙ / P₀)^(1/n) − 1. This simple price calculation excludes dividends, fees, taxes and transaction costs. It is not the same as a total-return backtest.
Work backward from a required return
With positive starting EPS and a positive exit multiple, the EPS growth required to reach annual price return r is g = [P₀ × (1 + r)ⁿ / (E₀ × M)]^(1/n) − 1. This answers what must happen under the chosen multiple, rather than proving that the required growth will happen.
Read a forecast fan correctly
A fan of low, middle and high scenarios shows how assumptions can produce different outcomes. It is not automatically a confidence interval. Compare growth and multiple assumptions, examine the business evidence, and treat each projected path as conditional. Negative or zero earnings require a different approach from ordinary positive-earnings P/E analysis.
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