Calculators

Calculator: Stock Expected Return Based on ROE and Book Value Growth

One of the most important assumptions long-term investors in stocks need to make is their expected rate of return, but I have been surprised to see so few expected return calculators freely available on the internet. For “back of the envelope” estimates, below is a very simple calculator based on the three components of expected return (dividends, book value growth, and multiple expansion), where we use the following variables:

  • Book value per share (BVPS) – this is a simple but important denominator for the value of most companies. Many investors dismiss book value as a measure because of how long companies can trade at high multiples (or deep discounts) to book value, but book value remains the denominator of ROE (next variable), includes a cumulative sum of retained earnings, and forward-looking projections of book value should eventually converge to current market value (net of dividends).
  • Return on equity (ROE) – the core of this model is translating accounting return on equity rates (net income divided by book value) into investor rates of return.
  • Earnings per share (EPS) – In this model, we project EPS each year by multiplying last year’s BVPS times the ROE.
  • Dividend per share (DPS) – Each year’s dividend is the payout ratio times EPS. This model allows you to set both a starting payout ratio and how much that payout ratio will change from year to year. BVPS growth from year to year is then equal to EPS minus DPS.
  • Multiple expansion / contraction – the dominant factor in short-term returns is how much the Price/Book (PB) ratio moves up or down in the market, which moves far faster than changes in earnings, dividends, or book value. This model allows you to set your expected P/B ratio at the of your time horizon to see how much this matters longer term.

This is meant to be super-simple, but should get you started. As always, this blog post and the below calculator are for illustration and discussion purposes only, and are not tax advice of any kind.

Stock expected return calculator

Book value per share:
Next year ROE (%):
YoY Change in ROE (points):
Payout Ratio (%):
YoY Change in Payout (points):
Current Share Price:
Expected Final Price/Book:
Time horizon (years):
Saving now vs later: which adds up to more?
BVPS ROE Payout
10 10 50



October 15th usually signals the start of the season to start looking at year-end planning for the 2018 US tax year, including this checklist of questions US taxpayers overseas should ask at least once a year. This post focuses on the question of Roth IRA conversions, as October 15th 2018 marks the last day Americans will be able to do recharacterize a 2017 conversion, as the the most recent tax bill (the “Tax Cuts and Jobs Act of 2017” or TCJA) makes 2018 and future Roth conversions irreversible. Hopefully this Roth IRA conversion calculator is a useful tool, if so, please do leave a comment below.

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