What is 'Earnings Power Value  EPV'
Earnings power value (EPV) is a technique for valuing stocks by making assumptions about the sustainability of current earnings and the cost of capital but not future growth. Earnings power value (EPV) is a specific formula: Adjusted Earnings / Cost of Capital. While the formula is simple, there are a number of steps that need to be taken to calculate adjusted earnings. The final result is "EPV equity," which can be compared to market capitalization.
BREAKING DOWN 'Earnings Power Value  EPV'
Earnings power value (EPV) was developed by Columbia University Professor Bruce Greenwald, renown value investor, who, through this valuation technique tries to overcome the main challenge in discounted cash flow (DCF) analysis related to making assumptions about future growth, cost of capital, profit margins and required investments. EPV is meant to be a representation of current free cash flow capacity of the firm discounted at its cost of capital.
Earnings Power Value Steps
EPV starts with operating earnings, or EBIT, not adjusted at this point for onetime charges. Average EBIT margins over a business cycle of at least five years are multiplied by sustainable revenues (Greenwald considers "sustainable" as "usually current" revenues) to yield "normalized EBIT." Normalized EBIT is then multiplied by (1  average tax rate). The next step is to add back excess depreciation (aftertax basis at onehalf average tax rate).
At this point, the analyst has a firm's "normalized" earnings figure. Adjustments now take place to account for unconsolidated subsidiaries, current restructuring charges, pricing power and other material items. This adjusted earnings figure is then divided by the firm's weighted average cost of capital (WACC) to derive EPV business operations. The final step to calculate equity value of the firm is to add "excess net assets" (mainly cash plus the market value of real estate less legacy costs) to EPV business operations and subtract the value of the firm's debt. EPV equity can then be compared to the current market capitalization of the company to determine whether the stock is fairly valued, overvalued or undervalued.

Earnings Before Interest & Tax ...
Earnings before interest and taxes is an indicator of a company's ... 
Discounted Cash Flow (DCF)
Discounted cash flow (DCF) is a valuation method used to estimate ... 
Absolute Value
Absolute value is a business valuation method that uses discounted ... 
Operating Margin
Operating margin is a measure of a company's profitability, and ... 
Adjusted Present Value  APV
The adjusted present value is the net present value (NPV) of ... 
Discounted AfterTax Cash Flow
The discounted aftertax cash flow method values an investment ...

Investing
DCF Valuation: The Stock Market Sanity Check
Calculate whether the market is paying too much for a particular stock. 
Investing
Methods used in valuing private companies
There are a few methods for calculating the valuation of a private company. By using financial information from peer groups, we can estimate the valuation of a target firm. 
Investing
Valuing Firms Using Present Value of Free Cash Flows
When trying to evaluate a company, it always comes down to determining the value of the free cash flows and discounting them to today. 
Investing
Learn to Value Real Estate Investment Property
Make sure you know what your real estate investment is worth before you sign the ownership papers. Learn what capitalization rate means to your net operating income. 
Investing
Equity Valuation In Good Times And Bad
Learn how to filter out the noise of the market place in order to find a solid way of determing a company's value. 
Investing
Market value versus book value
Understanding book value and market value is helpful in determining a stock's valuation and how the market views a company's growth prospects in the future. 
Investing
Yahoo Stock: Capital Structure Analysis (YHOO)
Learn about Yahoo's capital structure, including whether or not a decline in yearoveryear earnings is leading the company to use more debt. 
Personal Finance
Discounted cash flows or comparables: Which to use
DCF and comparables models are widely used in equity valuation, and here we'll explain the pros and cons of each method.

How do you find the level of EBIT where EPS doesn't change?
Learn about the relationship between earnings before interest and taxes and earnings per share and how to find the level ... Read Answer >> 
What is the formula for calculating net present value (NPV) in Excel?
Net present value is used to estimate the profitability of projects or investments. Here's how to calculate NPV using Microsoft ... Read Answer >> 
Do companies measure their cost of debt with before or aftertax returns?
Understand the before and aftertax calculations of cost of debt capital and how each is useful in deciding between funding ... Read Answer >> 
What is the difference between cost of equity and cost of capital?
Cost of equity is the percentage return demanded by a company's owners; the cost of capital includes the rate of return demanded ... Read Answer >>