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Extending the P/E and PEG Ratios: The Role of the Potential Payback Period (PPP) in Modern Equity Valuation

Publicada
Servidor
Preprints.org
DOI
10.20944/preprints202505.0213.v1

Traditional valuation metrics like the Price-to-Earnings (P/E) ratio and the PEG ratio have long served as tools for assessing equity value. However, these widely used measures often overlook key financial variables such as earnings growth, discount rates, and risk. This article introduces the Potential Payback Period (PPP) as an evolution in valuation methodology — one that enhances, refines, and extends the utility of P/E and PEG ratios. By offering a time-based measure of how long it takes for a company's earnings to recover the investment, and deriving a Stock Internal Rate of Return (SIRR) from it, the PPP integrates growth and risk into a unified framework. A visual and conceptual breakthrough — the Hidden Value Zone (HVZ) — is introduced, revealing how PPP identifies undervalued high-growth stocks that traditional PEG ratios misclassify. The analysis shows how PPP provides a more dynamic, forward-looking, and theoretically grounded approach to equity valuation, making traditional ratios more relevant when used in conjunction with this enhanced model.

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