Earnings Power Value (EPV): Definition and Simple Calculation
Earnings Power Value (EPV) estimates the value of a business based on sustainable earnings and an appropriate capitalization rate (1/discount rate). It assumes current earnings are sustainable indefinitely (no growth).
Exact formula used
Where τ=taxRate = 0.25; ebitdPerShareTTM is used; WACC is required and validated.
Notes
- More conservative than DCF.
- Works well for mature or cyclical companies where growth is uncertain.
- When EBITDA is unavailable, EPS is used to estimate fair value by accounting for taxes and adding back estimated depreciation and amortization.
Why This Matters
EPV provides a safety net for investors by establishing the minimum value of a company without growth assumptions. It helps avoid overpaying for stocks and provides a conservative anchor for valuations.