Earnings Power Value

RECENT NEWS
Value Investing  May 19  Comment 
[caption id="" align="alignright" width="79" caption="Bruce Greenwald"][/caption] Kudos to Jae Jun of http://oldschoolvalue.com for finding this. This is an excellent slide show where Bruce Greenwald describes one of his valuation techniques...
Jonathan Goldberg on Value Investing  Jul 28  Comment 
Earnings Power Value (EPV) is an estimate of the value of a company from its ongoing operations. The beauty of EPV, for value investors, is that the numbers used to calculate it are NO GROWTH free cash flows. No growth free cash flows just mean...




RELATED WIKI ARTICLES
 
TOP CONTRIBUTORS

Earnings Power Value is an estimate of the value of a company from its ongoing operations. The beauty of Earnings Power Value, for value investors, is that the numbers used to calculate it are no growth free cash flows. No growth free cash flows just mean that we are only subtracting from cash flows the amount of capital expenditure required to sustain the business. By using no growth free cash flows we eliminate, to a great degree, attempts to predict future growth and as such arrive at a number which we can be fairly certain of; we are using today's earnings, with the assumption that current profitability is sustainable. This isn't to say that some companies can't expect significant growth, but as value investors we refuse to pay for it.

Though we are using today's earnings (today's no growth free cash flows) in calculating Earnings Power Value, we are normalizing these earnings to the business cycle. This eliminates the effects on profitability of valuing the firm at different points in the business cycle. Ideally, this means that we are considering the average operating profit (as a percentage of total sales) over 5-8 years. This average would then be applied to current sales. Other adjustments to be made to the current year's cash flows would be to account for average expected one-time gains/losses.

The final step in calculating Earnings Power Value is to divide the final cash flow number by the cost of capital. This gives us the present value of a perpetuity without any estimation of growth. That is the Earnings Power Value.

Difference between net asset value and Earnings Power Value

Unlike net asset value which is an equity value, the Earnings Power Value result is the enterprise value of the firm; that is, adjustments need to be made to trim this down to equity value.

Wikinvest © 2006, 2007, 2008, 2009, 2010, 2011, 2012. Use of this site is subject to express Terms of Service, Privacy Policy, and Disclaimer. By continuing past this page, you agree to abide by these terms. Any information provided by Wikinvest, including but not limited to company data, competitors, business analysis, market share, sales revenues and other operating metrics, earnings call analysis, conference call transcripts, industry information, or price targets should not be construed as research, trading tips or recommendations, or investment advice and is provided with no warrants as to its accuracy. Stock market data, including US and International equity symbols, stock quotes, share prices, earnings ratios, and other fundamental data is provided by data partners. Stock market quotes delayed at least 15 minutes for NASDAQ, 20 mins for NYSE and AMEX. Market data by Xignite. See data providers for more details. Company names, products, services and branding cited herein may be trademarks or registered trademarks of their respective owners. The use of trademarks or service marks of another is not a representation that the other is affiliated with, sponsors, is sponsored by, endorses, or is endorsed by Wikinvest.
Powered by MediaWiki