Excess Earnings Method: Valuing Intangible-Heavy Businesses — Advanced Valuation Methods

§ 01

Excess Earnings = Total Earnings − (Tangible Assets × Required Return)

§ 02

The excess earnings are then capitalized at a higher rate (reflecting intangible risk) to derive the value of intangible assets. This method is particularly useful for brand-driven companies, professional services firms, and technology platforms.

§ 03

Pick a luxury brand or tech platform in **Fundamentals**. Calculate what earnings their tangible assets alone would generate at a 10% return. The gap is the value created by intangibles.

§ 04

A company earns $300M on $1B of tangible assets (30% return). If the normal return on tangible assets is 10%, how much of the earnings are ‘excess’?

§ 05

The Excess Earnings Method reveals the true source of competitive advantage. When most of a company’s value comes from excess earnings, the sustainability of its intangible assets (brand, network effects, switching costs) becomes the key valuation question.

§ 06

Valuing a software company. 95% of value is intangibles (IP, brand, user base). Standard DCF misses these. What method works better?

Five questions · AI feedback

Sit with the ideas.

A SaaS company has $50M in tangible assets and earns $45M NOPAT. The normal return on similar tangible assets is 10%. The company also has $200M in capitalized software development costs on its balance sheet. How do you think about excess earnings here?

Why:

Sit with the ideas.

Other lessons in this course.