An Intellectual History of Equity Valuation: From Discounted Income to Implied Returns // The Origin of the P/E Ratio

This paper examines the intellectual evolution of equity valuation from discounted income theory to return-based frameworks. It revisits the foundations of present value in actuarial science and early twentieth-century economics, and their formalization in the Gordon–Shapiro model, before situating discounted cash flow models (DCFM) as a numerical generalization rather than a distinct valuation theory. The paper argues that the widespread reliance on the price-to-earnings (P/E) ratio is problematic, as the metric is derived, non-invertible, and prone to conflating growth-driven long earnings duration with overvaluation. It then introduces the Potential Payback Period (PPP) and the Stock Internal Rate of Return Including Price Appreciation (SIRRIPA) as a re-expression of discounted-income valuation in time and return space, restoring interpretability and cross-asset comparability to equity valuation.