Before we go deep into the drivers of valuations we have dedicated this blog post on some formulas which explains the interlinkages between few critical financial metrics & valuations of a company.
The Formula for growth in earnings is
EPS Growth = Retention Ratio * Return on Equity.
This is a PAT level growth formula and this also includes Non-operating/ Non core income.
To understand how this formula leads to correct interpretation of growth please see below table. An important assumption behind this formula is that the business does not raise any new equity, the only addition to equity happens due to retained Earnings or some direct entries in Other comprehensive income (OCI).
Retention Ratio used in above table is equal to
PAT - Preference Dividends (rarely seen in Indian companies) - Common dividends