# PVGO - Interpretation

What is the best way to interpret PVGO? Is high PVGO good or bad?

PVGO is the PV of potential growth opportunities assuming a company can earn more than its cost of equity (discounted revenue generating activities), a high PVGO would indicate a company that has a lot of value but wont be realized to later…its not good/bad but relative to the investor (do they need current appreciation or can they wait)…hope this helps

You can also look at it as the amount of a stock’s price (if expressed on a per share basis) that represents future business expansion. It’s most useful for figuring out how much growth is implied by the stock price, and whether that growth seems reasonable or not. It’s also useful when comparing two companies to see if the growth prospects of one are radically larger or smaller than the other (and of course trying to figure out if that is a reasonable difference). I think the L2 material can also do the PVGO calculation in a P/E form, which can break down the PE into a portion that represents existing business and a portion representing future growth prospects. Often this is more comparable between companies. The CFA seems to emphasize the calculation more than the use, if I recall, but it helps to know how it’s used.

Imagine a company that earns (E) \$1.00 per share and has a cost of equity of 10%. If this compnay can find projects or investment opportunities that’ll return in excess of 10% , it’s a profitable venture and that “excess” return will measure the present value of growth. If it can’t reinvest that dollar at more than 10%, then the compnay is depleting the shareholder value and is better off paying out 100% of its earnings. This latter part is known as no-growth factor. Let’s look at it this way: The current stock price is \$20.00, EPS of \$1.00, r of 10%. Quantitatively, the equation would be: \$20 = \$1.00/0.1 + PVGO. This means (after some algebra) that of the \$20 value of the stock, \$10 comes from its growth opportunities and the ability to earn profits in excess of the “other” \$10 contributing to that value. As bchadwick mentioned, it can also be looked as Franchise PE (made up of a Growth Factor and a Franchise Factor), with FF = 1/r - 1/ROE. Hope this helps. EDIT: The answer to your second question is: YES. The higher the PVGO, the more profitable the company is (which could be a result of smart management, competitive advantage, strong brand, etc) the higher IRR it earns on reinvesting its earnings compared to the cost of its equity.

thanks guys - appreciate it