Tip 7 – What is the Payback Time and how to use it?

Payback Time is the estimated time it will take for the stock to double. This is calculated based on the growth rate of the stock price. This number should NOT be taken literally. Payback Time should be used as a comparing tool against other stocks. For example a stock with a Payback Time of 3 years will most likely double faster than a stock with a Payback Time of 7 years.

There are circumstances when some stocks will grow much faster than the listed Payback Time.  Let’s take two stocks that have relatively close Scores and compare their Payback Times as well as their results.  Here are two examples from January of 2021.

FTNT has a Score of 13 and a Payback Time of 3.98.  Regarding the score, this means the stock price is estimated to double in 3.98 years.  In this case, FTNT was at $77 in October of 2019 and as of July of 2020, it was at $149.  That’s a total return of 93%.  This stock nearly doubled in less than one year.

CPRT has a Score of 15 and a Payback Time of 8.73.  Regarding the score, this means the stock price is estimated to double in 8.73 years.  In this case, CPRT was at $79 in October of 2019 and as of July of 2020, it was at $90.  That’s a total return of 13%.

As you can see, FTNT is doubling faster than CPRT.  Use the Payback Time as a comparing tool against other stocks.

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