Some businesses earn returns far above what their tangible assets justify. The Excess Earnings Method values the intangible assets that drive these above-normal returns — brands, customer relationships, proprietary technology.
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.
§ 03Try it
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.
§ 04Check-in
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’?
§ 05Key insight
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.
§ 06Check-in
Valuing a software company. 95% of value is intangibles (IP, brand, user base). Standard DCF misses these. What method works better?
Check your understanding
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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?
