PVGO and Required Equity Return

How SurgeFlow combines CAPM and factor exposures to estimate required return and present value of growth opportunities.

Category: Fundamentals

Required return

Required equity return starts with the risk-free rate and adds priced factor exposures: required return = R_f + beta_mkt x equity risk premium + selected validated factor premia. Market, SMB, HML, RMW, and CMA can enter when they are validated; WML and LIQ are treated as selection signals rather than cost-of-equity components.

PVGO

With required return, EPS, and price, PVGO estimates how much of the stock price reflects future growth opportunities rather than capitalized current earnings: PVGO = price - EPS / required return.

Interpretation

High PVGO can be healthy for a durable compounder or dangerous for a fragile growth story. It becomes useful only when paired with earnings quality and valuation context.