Valuation is the second most important component of long-term return. The rate of change of earnings growth is actually the most important, as long as sound valuation is in alignment. However, if you paid too much for even the best company, and it gives you all the earnings growth and superb business results that you expect, or even more than you expect, you can still lose money.
Clearly, it's the growth rate of earnings that determines an investor’s long-term rate of return. However, valuation will have a major impact on both return and the risk taken to achieve it. If the company grows earnings by 5%, then investors should also expect a capital appreciation opportunity of 5%, assuming they purchased at sound valuation. If they overpay, their return will be less and vice versa. For stocks that pay a dividend, the dividend income and any growth in dividends represents a nice "kicker" to the total return.
Source: Seeking Alpha
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