Challenger has delivered a strong 83.9% share price gain over the past three years, yet the real story for investors is whether that kind of run is backed by the returns the business earns on its capital. With the stock last closing at A$9.85, the question now is how well that price lines up with the intrinsic value suggested by those returns.

• The 83.9% move over three years puts real weight on the issue of whether Challenger's current valuation can be explained by the profitability of the capital it employs.

• The recent on market buyback and cancellation of 3,243,185 shares trims Challenger's equity base, which can lift per share claims on future returns if the company continues to reinvest at attractive rates.

• If you'd rather focus on earnings, this one's for you. See why Challenger's 14.2x P/E tells a different valuation story .

The issue now is whether Challenger's share price around A$9.85 is justified by the returns it earns on its capital when set against an Excess Returns view of intrinsic value.

If you want to test the same question about returns on capital across a broader opportunity set, compare Challenger with companies in the 4 high quality undervalued stocks

Is Challenger Fairly Priced on Excess Returns?

The Excess Returns model looks at how much profit Challenger can earn on its equity above the return investors require. On the latest estimates, book value sits at about A$6.01 per share, with a stable book value projection of A$6.23 per share based on forecasts from 5 analysts. Stable EPS is modelled at A$0.76 per share, which flows from an average Return on Equity of 12.19%.

Against that equity base, the model treats the Cost of Equity as A$0.56 per share and the projected excess return as A$0.19 per share. That gap between what the business is expected to earn and what capital providers demand feeds into an intrinsic value that the Excess Returns projections suggest is broadly in line with the A$9.85 share price. Because the recent on market buyback reduced the share count, that capital management move helps explain why the market keeps pricing Challenger close to where the model points. Find out what Challenger could be worth using our Excess Returns estimate .

The Challenger Narrative: What Would Justify Today's Price?

Simply Wall St Narratives pick up where the valuation puzzle for Challenger leaves off, by spelling out which paths for growth, margins and earnings would need to play out for the stock to be worth materially more or less than today's price, and they sit on Simply Wall St's Community page. Rather than relying on a single multiple or model point estimate, each narrative lays out the assumptions behind its view of fair value so you can compare those with Challenger's future results as they arrive.