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The investment value of any asset is the present worth of all the cash it will pay its holder over its entire life, each payment discounted at the pure interest rate. For a stock that means future dividends, and for a bond it means coupons plus the return of principal. Market price is a separate thing that can drift away from this value, and the gap between them is what the investor exploits.
Earnings are valuable to a shareholder only insofar as they are eventually paid out as dividends. Earnings reinvested in the business count only through the larger dividends they later make possible.
The analyst forecasts a company's future explicitly: expected growth in earnings, the payout ratio in each period, and the point at which growth levels off or declines. These assumptions go into formulas that turn the forecast into a present value. This forces judgments about growth that were implicit to be stated and made checkable.
The total investment value of an enterprise equals the present value of all distributions to all its security holders combined. It does not depend on how the payouts are split among stock, bonds, and other claims. Changing the capital structure divides the value differently but cannot create or destroy it.
Prices swing far from investment value because buyers trade on expected resale prices, meaning what others will pay, rather than on the cash the asset will distribute. The 1920s boom and the crash that followed show what happens when valuation is cut loose from payouts. A disciplined investor buys when price is below the discounted value of distributions and holds on regardless of sentiment.
When most of a stock's dividends lie in the distant future, its present value becomes very sensitive to the interest rate and to how long growth is assumed to last. Small changes in either can multiply or collapse the valuation. So high prices for growth stocks rest on fragile assumptions about the far future, not on present earning power.