A stock you bought three years ago at ₹300 is now at ₹600. You have doubled your money, and the natural response is to feel you were right about something. The more useful question is which of three separate things did the doubling — because two of them can carry on and one of them usually cannot, and you cannot know what to watch until you know which you have been relying on.
- Earnings growth
- How fast profit per share actually grew, per year
- Change in the multiple
- Whether the market moved from paying, say, 15 times earnings to 22 times — a re-rating
- Dividend yield
- Cash paid out to you each year as a percentage of what you paid
Example: The three add up approximately rather than exactly, because they compound rather than sum. Over an ordinary holding period the approximation is close enough to be useful, and the point of it is the split, not the third decimal place.
A shopkeeper sells his shop after three years. Its annual profit has grown from ₹4 lakh to ₹6 lakh — that part he earned. But he also finds a buyer willing to pay six years of profit, where the shop down the lane fetched four years of profit when it changed hands. His sale price rises for two quite different reasons, and only one of them was his doing.
Earnings growth is what the business did. The multiple is what other people happen to be willing to pay for a rupee of that profit, which is a mood at least as much as a judgement. A rising price flatters both equally, and only one of the two is under anybody’s control.
Which of the three you can rely on
| Source of return | How durable it is | What it depends on |
|---|---|---|
| Earnings growth | The most durable of the three. It compounds year after year, and over a decade it dominates everything else | Whether the business can keep growing profits, and what return it earns on the capital it ploughs back |
| Dividends | Reliable while they are paid, and paid in cash you can see in your account | The company continuing to earn enough to pay them without borrowing to do so |
| Multiple re-rating | Not durable at all. A one-time gain that can reverse inside a single quarter | Other people’s willingness to pay more, which moves with interest rates, sentiment and the news cycle |
The same arithmetic works in your favour. Buying at a low multiple means that even flat earnings can produce a return if the multiple normalises, and it means a given rupee of profit costs you less. That is the whole idea behind earnings yield — profit per share divided by price, the return the business currently earns for every rupee you put in, expressed the way a deposit rate is expressed.
A total gain over several years, converted into an annual rate. It is the only form in which two holdings of different lengths can honestly be compared.
A stock returned 140% over four years. Earnings per share grew about 9% a year over the same period and no dividend was paid. Where did the return come from?
Teen saal mein dukaan ka munafa ₹4 lakh se ₹6 lakh hua — yeh dukandaar ne kamaya. Par bechte waqt kharidar 4 saal ki jagah 6 saal ka profit dene ko taiyaar hai — yeh usne nahi kamaya, mahaul ne diya. Share ka return bhi bas teen jagah se aata hai: kamai badhi, multiple badha, ya dividend mila. Kaun sa wala aapko mila hai, yeh jaanna zaroori hai — kyunki multiple wapas neeche bhi aa sakta hai.
- Total return ≈ earnings growth + change in the multiple + dividend yield. There is no fourth source.
- Earnings growth is the durable component; a re-rating is a one-time gain that can reverse.
- Split any past gain into its parts before concluding you were right about the business.
- The multiple you pay matters enormously over three years and much less over twenty.
- Earnings yield states the same thing as a P/E, in the language of a deposit rate.
Mark it done to track your progress through the curriculum.
Common questions
Short, direct answers to what people ask about this topic.
- re-rating meaning in stock market
- A re-rating is when the market decides to pay a higher multiple for the same rupee of earnings — the P/E expands and the price rises even though profits have not changed. It happens when the perceived quality, growth runway or risk of a business improves, and it reverses just as readily in a de-rating. Of the three sources of return this is the least repeatable one, because a multiple cannot keep expanding indefinitely.
- the total return an investor earns from a share comes from
- Three sources and no fourth: growth in the company’s earnings, a change in the multiple the market pays for those earnings, and cash returned through dividends or buybacks. Any realised return can be decomposed into those three parts after the fact. Knowing which one actually carried your gain is what tells you whether it can plausibly continue.
- how do you calculate CAGR of a stock
- Divide the ending value by the starting value, raise the result to the power of one divided by the number of years, and subtract one. A holding that went from ₹300 to ₹600 over three years compounded at roughly 26% a year. CAGR smooths a jagged path into a single annual rate, which makes it excellent for comparison and misleading if you forget how uneven the actual journey was.
- how is dividend yield calculated on a share
- Dividend yield is the annual dividend per share divided by the current market price, expressed as a percentage — a ₹12 annual dividend on a ₹400 share is a 3% yield. It rises automatically when the price falls, so an unusually high yield often reflects a collapsed price rather than a generous company. In India dividends are taxable in the shareholder’s hands at their applicable slab rate.
- earnings yield vs dividend yield difference
- Earnings yield is EPS divided by price — the entire profit attributable to your share, whether or not it is paid out — while dividend yield counts only the cash actually distributed. Earnings yield is simply the P/E ratio turned upside down, so a P/E of 20 is an earnings yield of 5%. The gap between the two figures is the profit the company is retaining and reinvesting on your behalf.