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Jonathan Goldberg
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Jonathan Goldberg holds an MBA from the Richard Ivey School of Business at the University of Western Ontario. He has a passion for finance and value investing in particular. Other interests include motorcycles, photography, reading (non-fiction), staying fit, surfing and traveling.
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Jonathan Goldberg on Value Investing
  • Earnings Power Value 0 comments
    Aug 16, 2009 8:32 PM
    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 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 EPV, 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 EPV 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 your EPV.
     
    Unlike net asset value (NAV) which is an equity value, the EPV result is the enterprise value of the firm; that is, adjustments need to be made to trim this down to equity value. In the investment articles on this site, EPV will refer to the equity value (per share) resulting from an EPV analysis.
     
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