New Delhi, Sept. 17 -- Investors often focus on whether a company can grow its earnings over the next few years. But strong profit growth alone does not guarantee that the stock will generate good returns.

A recent investor letter from Carnelian Asset Management & Advisors highlights another risk investors need to track: valuation de-rating.

The fund house uses the example of HDFC Bank, where profits compounded at about 20% between 2019 and 2026, while the stock delivered a negative 5% return over the period.

Carnelian explains a stock's return through two components: earnings and valuation multiple. If earnings rise and investors are willing to pay a higher multiple, the stock can benefit from both profit growth and a valuation re-rat...