What is earnings power value?

06 June 2025

Modern financial day trading is a complex process; traders often seek robust edges that consistently result in profits. Traditional technical signals frequently fail to deliver viable signals as market sentiments shift and market dynamics change. By focusing on the company’s ability to generate recurring earnings and Earnings Power Value (EPV), traders can focus on the company's tangible cash-flow capacity and increase the win rate. For traders, employing EPV in systematic strategies can deliver value: buying names trading below EPV per share and shorting those above. From quant traders to event-driven trading, EPV’s earnings-focused lens aligns well with both momentum and mean-reversion strategies. Together with traders, investors also integrate EPV into their methods to check for overly optimistic growth assumptions and select stocks with the most potential.
This guide will define EPV and its calculator and then illustrate an EPV ratio example to harness this timeless value framework.

Earnings Power Value Meaning and Origin

Earnings power value stems from a fundamental analysis as it is a valuation method to estimate a company’s intrinsic equity value by assuming current earnings are sustainable indefinitely with zero future growth. The earnings power value formula is actually a complex financial subject as earnings are normalized operating profits (usually average EBIT or NOPAT over a cycle) adjusted for maintenance capital expenditures. These adjusted earnings are then divided by the firm’s weighted average cost of capital also referred to as WACC, to define a baseline value of the company. Then we add any excess net assets and subtract debt to get the EVP equity. It is an accepted method to express EPV on a per-share basis for direct comparison to market price.

Unlike Discounted Cash Flow (DCF), the biggest advantage of earnings power value is its reliance on current earnings alone, which minimizes sensitivity to speculative assumptions, giving traders and investors more reliable trading signals.

Historical background

The EPV roots trace back to Benjamin Graham’s emphasis on earnings power and margin of safety, as articulated in The Interpretation of Financial Statements (1937). He thought that the business’s true value lies in its ability to sustain earnings, which was later refined by Greenwald. He and his colleagues at Columbia University formalized EPV and applied it to modern corporate finance. As a result, EPV became a more disciplined alternative to volatile DCF models. This unique approach of EPV allows traders and investors to rely on more defined parameters rather than uncertain future expansions, adding a powerful tool to their arsenal. This historical evolution also made earnings power value a value-investing cornerstone.

Earnings power value calculation

Earnings Power Value calculation relies on a formula and relies on a disciplined, step-by-step normalization of a company’s core earnings, eliminating noises to reveal its sustainable cash-flow capacity. The formula is a six-stage process that moves from raw financials to EPV equity per share.

Earnings power value calculation six steps

Below are all 6 steps to calculate EPV value per share:

1. Normalize EBIT

The first step is to smooth out the operating earnings (EBIT) over several years (the standard approach is 5-10 years of a full business cycle). This effectively removes all booms and busts and provides more standard and clean data to work with. This representative average EBIT reflects economic profitability rather than occasional peaks and troughs.

2. Adjust for Taxes (NOPAT)

The next step is to transform the normalized EBIT from the previous step into net operating profit after tax (NOPAT) by applying an approximate or effective tax rate. The formula for this calculator looks like this:

NOAPT = Normalized EBIT X (1 - t)

For example, if the average EBIT is 17 billion dollars and the tax rate is 25%, NOPAT becomes 12.75 billion.

3. Subtract Maintenance Capital Expenditures

True earnings power requires continual reinvestment to sustain current operations. For this, we deduct maintenance CapEX (not growth CapEX!) from NOPAT. It is also possible to estimate this number via historic CapEx-to-depreciation ratios.

4. Add Excess Depreciation & Other Adjustments

Companies often report depreciation above the minimum needed to maintain assets. Any excessive depreciation and analogous non-cash charges can be added back to remove the non-recurring gains or losses from our calculator. For example, one-time asset sales revenues and so on. With this, we isolate the core earnings of the company to ensure our EPV value is as close to reality as possible.

5. Divide by WACC to Get Gross EPV

The heart of EPV is to divide adjusted earnings by the weighted average cost of capital (WACC) to reflect the blended cost of equity and debt.

Choosing WACC requires estimating market‐value leverage and a cost‐of‐equity model (CAPM, build‐up method, etc.)

6. Add Excess Net Assets & Subtract Debt

The final step is to transition from enterprise to equity value by adding surplus cash or other excess net assets (assets apart from what is needed for operations) and subtracting interest-bearing debts. Then divide by the number of shares outstanding to calculate the final EPV number per share.

Any leases or off-balance-sheet obligations should be capitalized and subtracted at this stage as well.

Earnings power value formula broken down

All the above steps can be summarized in the following single expression:

Broken down:

Adjusted earnings = NOPAT - Maintenance CapEx + Excess Depreciation + Other Non-recurring Adjustments
WACC = Cost of Debt × (1 – Tax Rate) × (Debt / (Debt + Equity)) + Cost of Equity × (Equity / (Debt + Equity))
Excess Net Assets = Cash & Marketable Securities – Normal Working Capital Requirements
Debt - Interest Bearing Liabilities + Capitalized Leases
Shares - Diluted Shares Outstanding

The WACC is the default parameter in the EPV calculator, but some analysts prefer a hurdle rate or just the cost of equity when focusing on pure equity returns. However, this is typically used for small-cap firms, and using the WACC ensures a true enterprise-value perspective, which also incorporates the tax shield of debt.

Earnings power value ratio and examples

The EPV ratio compares a stock’s market price per share to its intrinsic EPV per share. When the market is below EPV it indicates that the stock is undervalued and the opposite is true when the share price is higher than the EPV value. For example, when the stock price is 20 USD per share but EPV is 30 USD, then the stock is discounted and it might be a good time to buy. If the stock price is overvalued, meaning its price is higher than what the EPV shows, then traders and investors should be extra cautious and avoid buying that stock. If it is a bull run or bull market, then stock prices might continue to be above the EPV for longer periods of time.

There is an entire portfolio management system developed to incorporate the EPV-stock price dynamics. These are portfolios long on the low market/EPV names (value) and short on the high market/EPV names to capitalize on the discrepancies between the real value of a share and its perceived value. These strategies align well with the Fama–French HML (“High Minus Low”) concept and they have been tested to generate profits year to year.

Earnings power value examples

Let’s briefly overview some of the real-world Earnings power value examples that indicate the viability of this ratio in trading and investing.

Apple Inc. (AAPL)

In March 2025, Apple’s EPV per share was calculated to be around $63.11, based on trailing five-year average earnings and maintenance of $8.9 billion, a WACC of 9%, excess cash of $48.5 billion, the interest-bearing debt of $98.2 billion, and 15.056 billion diluted shares outstanding. The calculation of EPV followed Greenwald’s approach:

Normalized EBIT → NOPAT (after-tax operating profit) minus maintenance CapEx plus excess D&A
Enterprise EPV = Adjusted Earnings / WACC = ($98.9 B – $8.9 B) / 9%
Equity EPV = (Enterprise EPV + Cash – Debt) / Shares = $63.11

Compared to Apple’s market price of 211.26 dollars, this indicated much higher market expectations for future growth over current earnings power. Apple is also a very powerful brand and this phenomenon is understandable, especially in a tech sector where investors often follow the tiniest of opportunities.

The Walt Disney Company (DIS)

In December of 2024, Disney’s EPV per share stood at $6.24 which was derived from adjusted earnings of $9.744 billion, average maintenance CapEx of $3.85 billion, and a 9% WACC. The EPV after adding cash, subtracting interest-bearing debt, and dividing by diluted shares, was $6.24 per share. With Walt Disney stocks trading at around 105.9 dollars at that time, the EPV highlighted how positive investors were about the company’s future growth potential.

Liz Claiborne Case Study (Circa 2008)

This is a classic Greenwald case, where Liz Claiborne (CSInvesting), which is a retailer, owned 116 million dollars of long-term debt (no short-term debt), surplus assets of around $ 100 million, and 57 million shares outstanding at a $2.4 billion market cap. EPV equity per share was calculated to be between 40-45 dollars, well above the $42 stock price at the time, which indicated that the share price and intrinsic value were almost identical.

Microsoft Corporation (MSFT)

Microsoft’s EPV was calculated to be around 25-30 dollars in the 2010s. This was in contrast with Microsoft’s share prices being $50-60, indicating modest growth expectations. With the share price being this high, the EPV could be used by investors to avoid investing too much in the company’s shares as its perceived value was far beyond its actual intrinsic value.

These real-world examples show how the EPV eliminates speculative growth from the equation, zeroes in on sustainable earnings, and directly calculates a clear per-share intrinsic value.

Traders can use these EPV per-share figures to form market/EPV ratios and buy stocks below EPV/share and short those above it. Investors also gain a disciplined way of defining which stocks are overpriced and which ones are promising buys.

Earnings power value application in investing

EPV can also be used by long-term investors who buy and hold stocks for years. The Earnings Power Value (EPV) provides a conservative and calculated anchor for growth projections. By calculating a company’s sustainable earnings under a zero-growth assumption, EPV acts as a margin-of-safety benchmark. When the price falls below EPV per share, value investors can become confident and seek long position opportunities. If the EPV is below the price of a stock, then value investors can exit from their long position and lock in profits.

Earnings power value application in portfolio construction

In multi-asset portfolios, layering an EPV tilt can enhance risk-adjusted returns by overweighting undervalued companies and underweighting overvalued ones.

One viable method is to rank stocks based on their market price divided by EPV per share (the EPV ratio). Allocate higher weights to the cheapest (market/EPV is below 0.8) and lower weights to the most expensive decile (market/EPV is above 1.2). While cheaper stocks (EPV-cheap) can offer higher returns, they often appear in cyclical or distressed sectors. To mitigate drawdowns traders need to employ strict risk management considerations:

Earnings sustainability - Exclude companies that have decreasing margins and or negative free cash flow trends, indicating the company’s health is worsening.
Quality filtering - Combine EPV with ROIC, gross margin, or other profitability metrics to avoid value traps.
Diversification - Do not invest all capital in one stock and one sector, try to spread across a multitude of different sectors and even regions when possible.

By using EPV in their market analysis and stock screening process, value investors who focus on long-term portfolios can get a disciplined valuation tool.

Trading strategies using EPV

Earnings power value application can also be effective in financial trading, namely when speculating on stock markets. Let’s overview some of the trading methods and then explain superior risk management techniques to ensure capital protection in the long run.

Rate-Regime rotation via EPV

Value premiums tend to vary in an interest-rate environment. In rising-rate regimes, financials and cyclical, often trading at deep EPV discounts, outperform as bond yields climb. Here are the main steps:

Rate regime signal - monitor a 6-month moving average of the 10-year treasury yield. When the yield is above the moving average it is a rising regime and the opposite is true for the falling regime.
Sector tilt - in rising regimes, focus on EPV names in financials and industrials while in falling regimes, shift towards EPV-expensive defensive stocks (consumer staples, healthcare, etc.).
Rebalance - when yield signals flip, rebalance positions. This typically happens once per quarter.

It is also a good idea to add other filters to increase the hit rate and reduce false signals.

EPV-based swing trades around corporate events

Swing traders can also employ the power of EPV to exploit short-term mispricings when news collides with low market/EPV signals:

Pre-event entry - Select stocks that trade at a market/EPV discount below 0.85 that are about to report earnings, announce M&A, or release guidance.
Directional filtering - long if the price is slow-mover while EPV is low and short if high multiple masks waning power.
Exit criteria - close within 1-2 weeks and trigger stop loss if losses exceed 5%.

When employing EPV trading techniques, traders should also focus heavily on proper risk management.

Risk management and drawdown control

EPV strategies can capture the value difference between the real price and the stock price of a company, but there are many threats such as value traps which should be avoided. Traders can exclude stocks with two consecutive years of declining NOPAT or negative free cash flows. Combining EPV with ROIC (return on invested capital) can also help to avoid low-quality stocks (ROIC > WACC). You should also always avoid trading correlated assets and try to diversify across different non-correlated instruments. Seasoned traders typically cap their individual positions at 2-3% of the portfolio to maintain low drawdowns during adverse times.