This calculator analyzes stock returns by breaking them down into two components: PE ratio changes (valuation) and EPS growth (fundamentals). It uses the formula: Total Return CAGR = ((Exit PE / Entry PE)^(1/years) * (1 + EPS CAGR)) - 1. For example, investing in a stock with PE 20 that expands to PE 25 over 5 years with 15% annual EPS growth will generate an estimated 26% CAGR, with approximately 4.5% coming from PE expansion and 15% from earnings growth.

Breaking down returns into PE ratio changes and EPS growth helps distinguish between sustainable returns (from business growth) and unsustainable returns (from valuation changes). This analysis can prevent mistaking a temporary PE expansion for fundamental strength. For example, a stock that delivers 25% annual returns with 5% from EPS growth and 20% from PE expansion suggests most gains came from investor sentiment rather than business improvement, indicating higher future risk.

Sustainable PE ratios vary by industry and growth rates but generally revert to sector averages over time. Technology companies might sustain PEs of 20-30 if growing at 15%+, while utilities typically trade at 12-18. When using this calculator, assuming Exit PE equals Entry PE provides a conservative estimate based purely on earnings growth. Our sensitivity analysis shows how different exit PE scenarios affect your returns, helping set realistic expectations.

The sensitivity table shows how your returns would vary with different exit PE ratios and EPS growth rates. For example, it shows that a 10% decrease in exit PE combined with a 5% increase in EPS growth might still deliver your target returns. This helps assess risk by showing how much PE contraction your investment can withstand while still meeting return goals, or how much additional EPS growth would be needed to offset PE contraction.

Realistic EPS CAGR varies significantly by sector and company size. For large-cap Indian companies, 10-15% represents good earnings growth, while selected mid-caps might achieve 15-20%. Small caps can potentially grow faster (20%+) but with higher volatility. Economy-linked sectors like banking typically grow near GDP+inflation (10-12%), while technology or specialized companies might sustain 15-20% growth. Use sector averages and historical performance as benchmarks when inputting EPS CAGR.

Market sentiment significantly impacts PE ratios through investor psychology. During bull markets, optimism expands PEs across the market (sometimes 30-50% above historical averages), while bear markets contract PEs (often 20-30% below averages). Interest rates also affect PEs - lower rates typically support higher PEs as future earnings become more valuable. This calculator's sensitivity analysis helps visualize how different market sentiment scenarios (reflected in exit PE variations) affect your overall returns.

Yes, this calculator works well for index return projections. For Indian markets, the Nifty has historically traded between 16-22 PE during normal conditions. By entering the current Nifty PE as Entry PE, estimating a reasonable Exit PE based on economic outlook, and using consensus EPS growth forecasts (typically 12-15% long-term), you can project possible index returns. The sensitivity table shows how different economic scenarios might affect your market-level returns.

EPS CAGR estimates become less reliable as the time horizon extends. Analyst estimates are typically most accurate for 1-2 years, with declining reliability beyond that. For longer horizons, consider using lower growth rates than historical figures to build in a margin of safety. Our calculator's sensitivity analysis helps address this uncertainty by showing returns across various growth scenarios, allowing you to see how your investment performs even if EPS growth falls 5-15% below expectations.