Working Paper
Reality Gap: A Heuristic Indicator for Fundamental Coverage
Hanns-Steffen Rentschler
Abstract
This paper introduces the Reality Gap (RG) indicator, a heuristic measure of the relationship between a company's market capitalisation and its estimated fundamental base. The fundamental base is FBₙ = TE + Eₙ where TE is tangible equity and Eₙ = N×G is the capitalised sustainable earning power (G = smoothed long-run earnings, N ∈ {8, 10, 12} the capitalization factor). The resulting ratio provides a descriptive, period-specific view of how far market valuations extend beyond what the underlying fundamentals directly support. The paper presents the formal construction of the indicator, discusses its assumptions and limitations, and illustrates its application across a sample of publicly traded companies. RG is explicitly not a valuation model and does not generate price targets or investment recommendations.
Citation
Please cite as:
Rentschler, H.-S. (2026). Reality Gap: A Heuristic Indicator for Fundamental Coverage. Working Paper.