Calculator
P/E Multiple Compression Calculator
Growth and valuation work together. Stress the future multiple instead of assuming today’s enthusiasm persists indefinitely.
A business can grow earnings while its stock produces a weak return if the valuation multiple contracts. This model compounds EPS, applies an editable future P/E ratio, and calculates the implied annualized price return before dividends.
How this p/e multiple compression calculator works
The calculator compounds current EPS at the selected rate, multiplies the future EPS by the future P/E, and compares that implied price with the current EPS multiplied by the current P/E.
Formula
Future price = current EPS × (1 + EPS growth)ʸᵉᵃʳˢ × future P/E
P/E is unsuitable for loss-making firms and can be distorted by leverage, cyclicality, accounting changes, and one-time items.
Primary specifications
Before you use the result
Assumptions
- • EPS compounds at one rate and remains positive.
- • The P/E inputs use comparable forward or trailing definitions.
- • Dividends, dilution, taxes, and interim valuation changes are excluded.
Quick start
- 1. Use normalized EPS rather than a one-time peak or trough.
- 2. Test several earnings-growth and exit-multiple combinations.
- 3. Identify what business evidence would support each scenario.
Frequently asked questions
What is multiple compression?
It is a decline in the valuation investors pay for each unit of earnings, such as a P/E falling from 30 times to 20 times.
Can EPS growth offset compression?
Yes, but the required growth depends on the size and timing of the multiple decline.
Does the return include dividends?
No. The result measures price return from EPS and P/E changes so distributions should be considered separately.
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