Earnings power value (EPV) is a valuation method used to determine the intrinsic value of a company. The EPV method is based on the idea that a company's true value is determined by its ability to generate earnings and that the present value of future earnings is the best indicator of a company's intrinsic value.
The EPV formula is calculated by taking the company's earnings before interest, taxes, depreciation, and amortisation (EBITDA) and multiplying them by a factor that represents the company's earning power. This factor is known as the "earning power multiplier" (EPM) and is determined by analysing the company's historical financial performance, industry trends, and other factors that may affect the company's earning power.
For example, a company with a strong track record of consistent earnings growth and a high EPM would have a higher EPV than a company with weaker earnings and a lower EPM.
There are different ways to calculate the earning power multiplier; one common method is to use a ratio of the company's EBITDA to its capital employed (EBITDA/CE). This ratio measures the company's earning power relative to its capital investment and is used to compare the earning power of different companies in the same industry.
Another way is to use a ratio of the company's EBITDA to its enterprise value (EBITDA/EV). This ratio measures the company's earning power relative to its overall value and is used to compare the earning power of different companies across different industries.
Example: A company has an EBITDA of $10 million and a capital employed of $50 million. The earning power multiplier for the company would be 0.2 (10/50).
If the company's intrinsic value is calculated to be $100 million, the EPV would be $20 million (10 million x 0.2).
It's important to note that the EPV method has some limitations, as it relies on historical financial data and does not take into account future growth potential or other factors that may affect a company's earning power. Additionally, the EPV method does not consider the company's risk profile or the time value of money, which are important for the calculation of intrinsic value.
In conclusion, the "Earnings Power Value" (EPV) is a method used to determine the intrinsic value of a company by analysing its earning power. It is calculated by multiplying the company's EBITDA by a factor known as the earning power multiplier (EPM). There are different ways to calculate the EPM, like using the ratio of EBITDA to capital employed (EBITDA/CE) or EBITDA to enterprise value (EBITDA/EV). The EPV method can be a useful tool for evaluating a company, but it has some limitations, as it relies on historical financial data and does not take into account future growth potential or other factors that may affect a company's earning power. Additionally, the EPV method does not consider the company's risk profile or the time value of money.
