Making the P/E Ratio a Truly Dynamic Valuation Metric: Gordon-Shapiro vs. Potential Payback Period (PPP)

The traditional Price-to-Earnings (P/E) ratio is widely used but remains static, overlooking growth, discounting, and risk. This article compares two models that address these limitations: the Gordon-Shapiro Model and the Potential Payback Period (PPP), a dynamic valuation framework initiated by the author. While the former projects dividends or earnings over an infinite horizon and requires that growth be lower than the discount rate (g < r), the PPP adopts a finite-horizon, logarithmic structure valid even when g ≥ r. By linking valuation to discounted earnings recovery, the PPP generalizes the raw P/E ratio and converges to it when g = r = 0, highlighting its universality and versatility.