Earnings Power Value
In short
Values a company on its current sustainable earnings, assuming zero growth
EPV asks a simple question: if this company never grew again, what would it be worth based on the profits it makes today? Assuming zero growth gives a conservative 'floor' value — anything the market pays above it is paying for future growth.
Earnings Power Value (Bruce Greenwald, Columbia Business School) values a business on its normalised, sustainable operating earnings divided by the cost of capital, with no growth assumed. Comparing EPV to the market price shows how much of the price is growth: if EPV sits far below the price, the market is paying a large premium for future growth; if EPV is near the price, little growth is priced in.
Formula
EPV = (Normalised After-Tax Operating Earnings ÷ WACC) + Cash − Debt, then ÷ sharesRelated concepts
- DCF Model — Imagine a friend promises to pay you $100/year for 10 years. Would you pay $1,000 today? Not quite — money tomorrow is worth less than money today. DCF calculates what future cash flows are worth right now.
- Intrinsic Value — The market price is what people are willing to pay right now. Intrinsic value is an estimate of what the stock is actually worth based on the company's cash flows and assets. If a $40 stock has an estimated intrinsic value of $55, the gap ($15) is what practitioners call the margin of safety.
- WACC — WACC is the average rate a company pays for all its funding — both equity (shareholders expect returns) and debt (banks charge interest). It's the minimum return a company must earn to create value.
- Margin of Safety — If you think a stock is worth $100, don't pay $100 — pay $70. That 30% discount is your margin of safety. If your estimate is wrong, you still might not lose money.