BRUCE GREENWALD EPV PDF

Here is how Investopedia describes the EPV model: Earnings Power Value EPV is a technique for valuing stocks by making an assumption about the sustainability of current earnings and the cost of capital but assuming no further growth. As Investopedia suggests, calculating adjusted earnings is part art, part science. The models on finbox. Here is a look at the buildup: By default, finbox. At the mid-point, the model use the median over last five years.

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But when I went into its calculations, its phenomenally detailed and good. I was really impressed with the person who developed such a concept. Who is Bruce Greenwald? Since , he is working in Columbia Business School as a Professor. This course is only for the Columbia Business School first-year students.

So, when a person of the stature of Bruce Greenwald develops a stock valuation model, it must be something out of the box. As different people may assume different rates, hence intrinsic value calculated through DCF differs from person to person. These numbers are already present in companies financial reports, hence need of guess work is almost eliminated. Current profits are sustainable.

What does it mean? It means, we are valuing a company assuming that it will do just enough to sustain its profit levels. Means same profit will continue to yield year after year in future. But profit growth will be zero. So do not get too bothered about that zero growth thing. Generally companies does business to generate profits, and also to grow in future. But in EPV approach, the future growth portion is not considered for evaluation. How a company can maintain current profit levels?

Capital expenditure is done for the following two purposes: Modernisation of existing operations. Generally speaking, modernisation activity is done to sustain the current profit levels. Expansion activity is undertaken to fund future growth. Inside the Modernisation Capex, there can be again two parts: Maintenance Capex.

Improvement Capex. But companies do not declare how much they are spending on Maintenance Capex, so how to get this value? There is a nice way, we will see it when we read the detailed steps involved in EPV.

The approach of EPV to arrive at a potential intrinsic value of a company is extremely logical. Cash flow represents real money that gets credited into the companies bank accounts. But EBIT is just a representation of future profit. So what is the problem with EBIT? If something goes wrong, company may not receive the money from its customers.

It means, EBIT does not convert into real cash flow. But not receiving money from customers happens rarely. More common phenomenon is delayed payments. It is not uncommon for companies to receive the due payments from customers very delayed.

In such cases, though companies financial reports are showing healthy EBIT, but if this money never arrives the company on time, its a problem. But never mind, good companies always find a way to recover their stuck EBIT from customers. This is where strong Management Team comes to work. Though the procedure can be lengthy, but the steps involved are very logical and systematic.

Step 1. But we will not deal only with one year margins. Because in some years, companies margin is better. While in other it is lower. We would not like to pick a too-high or a too-low margins. A better approach will be to consider a average margin for a complete business cycle.

With respect to a company, a time horizon of 5 years is a sufficiently long period to include all business cycles high, low, moderate all.

Instead, we will use normalised EBIT. What is normalised EBIT? Step 3. After Tax N. It is the Capital Expenditure incurred by the company to maintain its current profit levels. There are no standard ways to calculate Maintenance Capex.

Step 5. DCF model is much better option for valuation of growth stocks.

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Earning Power Value (EPV) Method of Stock Valuation

EPV equity can be compared to the current market capitalization of the company to determine whether the stock is fairly valued, overvalued, or undervalued. Normalized EBIT is then multiplied by 1 - average tax rate. The next step is to add back excess depreciation after-tax basis at one-half average tax rate. Adjustments now take place to account for unconsolidated subsidiaries, current restructuring charges, pricing power, and other material items. EPV is meant to be a representation of the current free cash flow capacity of the firm discounted at its cost of capital. EPV equity can then be compared to the current market capitalization of the company to determine whether the stock is fairly valued, overvalued, or undervalued. It was developed by Columbia University Professor Bruce Greenwald, a renowned value investor who, through this valuation technique, tries to overcome the main challenge in discounted cash flow DCF analysis related to making assumptions about future growth, cost of capital, profit margins, and required investments.

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Earnings Power Value (EPV) Stock Valuation How-To

But when I went into its calculations, its phenomenally detailed and good. I was really impressed with the person who developed such a concept. Who is Bruce Greenwald? Since , he is working in Columbia Business School as a Professor. This course is only for the Columbia Business School first-year students.

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Bruce Greenwald’s Earnings Power Value EPV Lecture Slides

Multiple methods based on industry and competitors used occasionally Disadvantages of Stock Valuation Methods Discounted Cash Flow Need to estimate a growth rate. Be conservative Need to project into the future Does not work well for young, growth or cyclical businesses Ben Graham Formula Uses earnings which can always be inflated even if it is normalized Projects using a EPS growth rate Back tests have shown that the value is the upper range and overly optimistic Ben Graham Net Net Formula Calculates the value of assets only Does not provide an upper range indicator A snapshot valuation method Multiples Valuation Useless if business has no direct competitors e. Mead Johnson Nutritionals. The stock valuation method allows the investor to value all of the above points. A full detailed explanation of earnings power valuation in a practical step by step guide is available for Microsoft. The stock investment spreadsheet also allows you to perform a fully automated earnings power value stock analysis. The EPV section starts from slide

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