PVGO Calculator

What is Present Value of Growth Opportunities (PVGO)?

The Present Value of Growth Opportunities (PVGO) measures the net present value of all future investments and growth projects that a company is expected to undertake. In equity valuation, a stock's total market price can be decomposed into two distinct components: the value of existing assets assuming zero growth, and the present value of future profitable reinvestments.

PVGO Formula

The basic stock price decomposition formula is:

$$P_0 = \frac{\text{EPS}_1}{r} + \text{PVGO}$$

Rearranging to solve for PVGO gives:

$$\text{PVGO} = P_0 - \frac{\text{EPS}_1}{r}$$

Where:

• $P_0$: Current stock price
• $\text{EPS}_1$: Expected earnings per share over the next period
• $r$: Cost of equity capital or required rate of return
• $\frac{\text{EPS}_1}{r}$: Value of a zero-growth perpetuity company (paying 100% of earnings as dividends)

Interpreting PVGO Values

Analyzing the proportion of stock price represented by PVGO helps investors classify company maturity:

• High Positive PVGO (% PVGO > 50%): Growth companies (such as tech firms) where investors expect high return on equity (ROE > r) from reinvested earnings.
• Zero or Low PVGO (% PVGO ≈ 0%): Mature dividend-paying companies where return on capital equals cost of equity.
• Negative PVGO (PVGO < 0): Value-destroying companies where reinvestment returns are less than cost of equity (ROE < r).