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2001issue C051-4

Earnback period ranking for growth-adjusted screens

The earnback period restates an earnings multiple at a stated constant growth rate as the years a firm needs to accumulate earnings equal to the current share price. Used as a screening overlay, that years-to-recover figure can rank names on a constant-earnback contour, with rotation or abstention only after a separate risk and growth-credibility check.

  • The earnback period is the years a firm needs, at a stated constant earnings-growth rate, to accumulate earnings equal to the current share price; with zero growth it collapses to the ordinary earnings multiple.
  • A multi-year average return on equity, or another credible historical earnings-growth rate, can supply the constant-growth input so names with different growth paths can be ranked together.
  • A constant-earnback contour in earnings-multiple versus growth space places richer combinations above the curve and cheaper ones below it.
  • A short earnback can reflect concentrated business risk rather than cheapness, so a rank-based rotation should wait for a risk and growth-credibility review.
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What the earnback period measures

The earnback period is the number of years a firm with constant earnings growth needs to accumulate earnings equal to the current share price. With zero growth that quantity collapses to the ordinary earnings multiple.

The earnings multiple is price divided by a single period’s earnings. It does not adjust for differing growth paths when names are compared. Earnback generalizes the earnings multiple so names with different growth rates can be ranked together.

How years to recover are formed

Under constant growth, earnback equals the natural log of one plus growth times the earnings multiple, divided by the natural log of one plus the growth rate.

A sustainable growth input

A multi-year average return on equity can supply the growth input because it carries a financially sustainable rate. Other credible historical earnings-growth averages may replace it, and unsustainable estimates should be revised.

A scaled multiple is not years to recover

Scaling the earnings multiple by a growth percentage is an empirical shortcut with informal cheapness cutoffs. It is not a years-to-recover interpretation.

A constant-earnback contour

An earnback level of 9, near the sample median of 8.8 and mean of 9.4, traces a curve in earnings-multiple versus growth space. Richer combinations sit above the curve and cheaper ones sit below it.

A historical rank association

In the mid-1999 sample, the rank correlation of earnback with the following half-year return was -0.28, versus -0.10 for the earnings multiple, and only the earnback association was significant at 5%.

Rank, rotate, and review risk

Ordering names by increasing earnback treats shorter recoveries as cheaper candidates and longer recoveries as richer, subject to risk review. A short earnback can indicate concentrated business risk rather than cheapness, so a median- or mean-based split should be followed by a risk and growth-credibility review before any rank-based rotation.

Earnback ranking is a screening overlay rather than a mechanical allocation rule.

June 1999 earnback-period ranking, Helsinki sample

Each name is the June 1999 earnback period from the authors’ Helsinki Stock Exchange table, ordered from shortest to longest years to recover. The nine-year line is the constant-earnback screen they treated as the split between the cheaper and richer cohorts. Nokia at 7.5 years sits on the short side even though its June P/E was 27.3. Every plotted year is copied from that printed table, which used five-year average ROE as the growth input.
Each name is the June 1999 earnback period from the authors’ Helsinki Stock Exchange table, ordered from shortest to longest years to recover. The nine-year line is the constant-earnback screen they treated as the split between the cheaper and richer cohorts. Nokia at 7.5 years sits on the short side even though its June P/E was 27.3. Every plotted year is copied from that printed table, which used five-year average ROE as the growth input.Helsinki Stock Exchange sample · June 1999 · 1999-06-01T00:00:00.000Z to 1999-12-31T00:00:00.000Z

Expected growth is the five-year average return on equity, used as a financially sustainable rate. Nine years is the authors’ screen because it sits near the sample median of 8.8 and mean of 9.4. Subsequent six-month returns are reported in the same table but use a different unit, so they are not plotted.

Educational research material, not investment advice. Historical source context does not establish present-day performance.
8 of 16 in the Value investing track
20031-2 pp.Next on Value investingStress-testing calendar yield rotation in a declining tapeThe evaluated procedure ranked a 30-name industrial average by dividend yield, bought the ten highest-yielding members, and held that sleeve for one calendar year before repeating the sort.
All readings on this track · 16 readings
  1. 1988A two-rule classroom book of cheapness and new highs
  2. 1995A supermarket-chain case for yield, trendline, and a written checklist
  3. 1996Annual normalized-yield rank rotation for cyclical sleeves
  4. 1996Value filter then rank-rotate as one procedure
  5. 1997Dow high-yield rank rotation as a testable portfolio procedure
  6. 1998Low relative P/E plus a trendline reversal for regime-aware stock selection
  7. 1998Rank rotation, value screens, and ten-stock diversification
  8. 2001Earnback period ranking for growth-adjusted screens
  9. 2003Stress-testing calendar yield rotation in a declining tape
  10. 2003A value overlay and strangle hedge during a growth-led regime
  11. 2005Unfashionable value versus momentum in the book
  12. 2007Why premove fundamentals rarely flag tenfold-price moves
  13. 2012Year-end yield rank rotation with a collapse veto
  14. 2015A five-name January book from yield and price ranks
  15. 2017Screening value traps with regime-aware overlays
  16. 2017A pre-trade fail test for the cheap-looking name
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