Where the return comes from

Shares go up for reasons, and there are only three of them.

Return ≈ earnings growth + change in the multiple + dividend yield

Every rupee you make from a share arrives through one of those three doors. Knowing which one you are relying on is the difference between investing and hoping.

One: the business earns more

The company sells more, or keeps more of what it sells. Profit per share rises.

This is the durable source. It is produced by the business doing its job, it does not depend on anyone's mood, and over long periods it is the only one that can keep going indefinitely.

If earnings per share double over five years and nothing else changes, the share roughly doubles. Not because anyone decided to be more optimistic — because there is twice as much profit behind each share.

Two: the market pays more for the same earnings

The multiple — usually the price-to-earnings ratio — is what buyers will pay for each rupee of profit.

A company earning ₹10 a share at a P/E of 20 trades at ₹200. If the market's view improves and it re-rates to a P/E of 30, the share is ₹300 with the business entirely unchanged. That 50% gain came from opinion.

This is re-rating, and three things about it matter:

It is real money. Your gain is identical whichever door it came through.

It is not repeatable indefinitely. A P/E can go from 15 to 30. It cannot keep doing that for ever, and a market that has re-rated is a market that has spent some of its future return in advance.

It runs both ways. De-rating is the same mechanism in reverse, and it can wipe out years of genuine earnings growth while the business does nothing wrong at all.

Move the ending P/E up and down in that widget and watch how much of a "good investment" turns out to have been opinion rather than performance.

Three: dividends

Cash the company pays you. Chapter 3 is entirely about it.

It is the most reliable of the three — a dividend received is banked and cannot be re-rated away — and usually the smallest for a growing company, because profit paid out is profit not reinvested.

Why the split matters

Because it tells you what you are betting on, and what has to be true for you to be right.

Relying on earnings growth: you are betting the business performs. That is a question about the company, which chapters 4 to 16 of the company-analysis subject are designed to help you answer.

Relying on re-rating: you are betting other people will feel differently about it later. That can be correct, and it is a bet on sentiment rather than on operations — and sentiment has no obligation to cooperate on your timetable.

Relying on dividends: you are betting the cash keeps coming, which is a question about the durability of profits rather than their growth.

Most bad equity experiences come from believing you were doing the first while actually doing the second.

Looking backwards honestly

The same arithmetic makes past returns legible. A stock that returned 20% a year for five years might have:

• grown earnings 20% a year, with the multiple unchanged — the business did it; or
• grown earnings 5% a year and re-rated from 12 to 25 — the market did it.

Same return, completely different implications for what happens next. In the first case, the return can continue if the business can. In the second, the next five years start from a multiple that already reflects a lot of optimism, and repeating the trick requires an even more optimistic buyer.

Nobody can tell you which will happen. The decomposition at least tells you what you are asking for.

The point

Earnings growth, re-rating, dividends. Two come from the business and one comes from opinion. They pay identically and they do not repeat identically — and knowing which one produced a past return is most of what that return tells you.