The value of a business assuming its current normalised earnings continue indefinitely with zero growth — a conservative analytical floor distinct from growth-dependent DCF valuation.
“An investment operation is one which, upon thorough analysis, promises safety of principal and an adequate return. What can this business earn, on average, over many years? That is the question that matters. Growth is a bonus, not a premise. — Benjamin Graham”
— Benjamin Graham
Deeper Explanation
Formalised by Columbia professor Bruce Greenwald, a direct intellectual successor to Benjamin Graham, Earnings Power Value (EPV) is calculated as: normalised EBIT × (1 − tax rate) ÷ WACC. It answers the question: what is this business worth if it never grows? This creates a powerful analytical framework with three cases. If EPV significantly exceeds the cost of reproducing the assets (replacement value), the gap represents franchise value — the competitive advantage that allows above-normal returns without growth. If EPV equals replacement value, the business earns a normal return; growth is neutral in value terms. If EPV is below replacement value, the business earns subnormal returns and growth actually destroys value. EPV also provides a conservative valuation floor: if you are paying below EPV for a business, you need no growth assumptions to justify the investment — margin of safety is highest at this level. EPV is particularly useful for value investors who want to separate what they are paying for the existing business from what they are paying for future growth.
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