Ben Graham described three main value investing approaches.

        The first approach, the value of assets in place prescribes the liquid assets upon which money can be obtained anytime and it is seen on a balanced sheet, such assets are called current assets. Value of the firm with great accuracy is understood by analysts by just focusing on liquid assets. Confident evaluation of place is done by analysts by avoiding fixed assets such as net plant and equipment or good will. According to Graham, “net-net working capital” position of the firm can be calculated by subtracting the value of liabilities present on the firm.

        The firm is appropriate for acquisition if place is worthy enough to pay off all the debts. If the place is bought in such condition along with liabilities then debt can be restored and productive capacity and fixed assets are owned straight out. There are not so many opportunities to have a company in such condition but it is helpful to see how fast a company can remove all of its liabilities from the firm.

        The value of asset in place determines the present value or fair market of asset using book values, option pricing models or comparable, and absolute valuation model such as the analysis of discounted cash flow. These assets include various investment kinds in marketable securities like bonds, stocks and options; intangible assets like patents, brands, and trademarks; or tangible assets like equipment and buildings (Cordes, Ebel and Gravelle 2005).

        Graham discussed and promoted another valuation metric under discussion which is known as Earnings Power Value (EPV). EPV does not calculate the future flow of cash but instead focuses upon the value of adjusted earnings. Main focus is on current earnings, and it is predicted that if company continues to earn with certain earning pattern then there is good possibility of continuing such good cash inflow pattern in future. EPV considers the distributable cash as a guarantee which ha ability to last forever. Distributable cash flow includes adjustments for depreciation, working capital and year on year investment in capital.

    The Earnings Power Value’s formula is based on the assumption that the firms’ current earnings are sustainable under a scenario that there is no growth. Enterprise value is estimated by EPV by dividing the weighted average capital cost and an earnings measure (Greenwald, et al. 2004).

        In the above equation r represents a cost of capital. The adjusted earnings is arrived by adjusting the one-time charges earning, taxation adjustments, capital expenditures, depreciation, and more adjustments that are based on an economic business cycle along with the other details. It can be difficult to find the adjusted earnings.

Earnings Power Value Technique

The earnings power value’s valuation technique requires the investor to carefully consider the following 3 things.

The assets’ value a will be required by competitor to have so that the same market value of the incumbent company could be achieved in the industry.

Earnings power value estimated based on current financial status where the business cycles has ignored by resulting intrinsic value.

Either the growth is a factor or not. In this valuation technique, growth is usually ignored, so it is better not to go into the aspect of growth.

    Value of growth can be either net value of growth or present value of growth. Present Value of Growth gives a different approach to analysts to equity valuation.

        In Graham’s opinion the growth does not count unless the company has a competitive advantage in market. Growth matter when a competitive advantage is present. Graham believed the zero sum game as he says an open market with zero has only few existing barriers. If a company intends to grow it and business, it should invest in working with capitals in order to maintain the growth which is long term and leaves shareholders with no additional cash flow. According to Graham, growth is accepted as the most reliable factor as it guarantees a value to the firm. Growth is not counted if a firm lacks competitive advantage in the market. (Gerstein, 2003).

References main value investing approaches

Cordes, Joseph J., Robert D. Ebel, and Jane Gravelle. 2005. The Encyclopedia of Taxation & Tax Policy. The Urban Insitute.

Greenwald, Bruce C. N., Judd Kahn, Paul D. Sonkin, and Michael van Biema. 2004. Value Investing: From Graham to Buffett and Beyond. John Wiley & Sons.