Chuck Carnevale explains how the power of compounding can help investors understand the relationship between a company’s earnings growth and long-term returns.
He starts with the Rule of 72: divide 72 by an annual growth rate to estimate how many years it takes for a value to double. At 10% growth, that’s about 7.2 years; at 20%, about 3.6 years. Over a long period, those extra doublings can create a much larger difference than the rates alone might suggest.
Using FAST Graphs, Chuck compares the historical earnings growth and investment returns of Raymond James Financial, Edison International, Meta Platforms, and Aflac. He also looks at analyst forecasts for Advanced Micro Devices to show how rapid projected growth could affect future returns if those estimates are met.
The lesson: look at a business’s growth rate alongside its valuation. Earnings growth can be a powerful driver of long-term returns, but actual results can differ from a simple compounding calculation as earnings, dividends, and P/E ratios change.
Learn how to use the Rule of 72 and FAST Graphs to put a stock’s growth potential into perspective.
Comments
Log in or sign up to join the conversation.