How to Use Earnings Power Value Instead of a DCF

Earnings Power Value is a valuation method built on a deliberately narrow premise: forget growth for a moment, and ask what a business is worth if it never grows again. No five-year revenue ramp. No terminal-value assumption quietly doing three-quarters of the work, the way it does in most DCF models. Just today's sustainable, after-tax earnings, capitalized at the cost of capital. Full stop.

Bruce Greenwald built the method at Columbia Business School largely as a reaction to how much of a standard DCF's output is really a story about the far future rather than a measurement of the present. I've written before about how terminal value tends to dominate and destabilize a DCF — nudge the terminal growth assumption by a single point and the whole valuation can move by a fifth or more. EPV sidesteps that problem by refusing to make the assumption at all. It doesn't forecast growth, positive or negative. It prices the business as if this year's normalized earnings are what you get, forever, and nothing else.

That's either a feature or a flaw depending entirely on what kind of business sits in front of you. For a company that has genuinely stopped growing — mature product lines, saturated markets, capital spending that just maintains what already exists — EPV lands close to the truth, and it's honest about being close to the truth. For a business still finding profitable places to reinvest its cash, that same zero-growth assumption throws away most of what the business is actually worth. This post covers the mechanics, a full worked example using Clorox's fiscal 2026 numbers, and where the method quietly stops being useful.

What Earnings Power Value Actually Assumes

The formula itself is almost insultingly simple, which is part of the point.

Earnings Power Value (Greenwald Method) EPV = Adjusted Earnings / r Where: Adjusted Earnings = Normalized after-tax earnings power, with one-time items and non-recurring benefits stripped out r = Cost of capital (required rate of return) No growth term. EPV assumes the business's current earnings continue unchanged, in perpetuity.

Two inputs, both of which have to be defended rather than pulled from a template. Adjusted Earnings means normalized after-tax earnings power — average out cyclical swings, strip out one-time gains and charges, and back out any benefit that came from an event that isn't going to repeat. The cost of capital, r, is the same required-return concept that shows up in every DCF: a risk-free rate plus a premium for the business's actual market sensitivity, not whatever discount rate would make the valuation come out higher.

The part that trips people up is what's missing. There's no reinvestment rate, no return-on-incremental-capital assumption, no multi-year build. Greenwald's framework treats maintenance capital spending as already embedded in normalized earnings — a business replacing worn-out equipment at the pace it's always replaced worn-out equipment isn't growing, it's standing still, and EPV prices it exactly that way.

A Worked Example: Clorox's No-Growth Case

Clorox is a reasonable test case for EPV, and a timelier one than it looks at first glance. The company reported fiscal 2026 results — the year ended June 30, 2026 — on August 3, 2026, two weeks before this post went up, and the year was messy enough that normalizing it properly is the whole exercise, not an afterthought.

Net sales fell 5% to $6.72 billion, and adjusted diluted EPS dropped 28% to $5.53 from $7.72 a year earlier, according to Clorox's fourth-quarter and full-year fiscal 2026 earnings release. Organic sales — stripping out currency and the GOJO acquisition — fell 13% in the fourth quarter alone, which the company attributed mostly to softer category volume and a heavier promotional environment rather than any loss of shelf space or brand strength. GAAP diluted EPS came in at $4.81, down 26% from $6.52 in fiscal 2025.

Layered on top of that softness: Clorox closed its $2.25 billion acquisition of GOJO Industries — maker of Purell — on April 1, 2026, adding a skin-health and hygiene business doing close to $800 million in annual sales, priced at roughly 2.4 times sales and 11.9 times EBITDA, per the company's 8-K disclosures. GOJO contributed only about a quarter's worth of results to the fiscal 2026 numbers, which means the $5.53 adjusted EPS figure both understates Clorox's forward run rate — a full year of GOJO isn't in there yet — and complicates the entire premise of "normalized, no-growth earnings" that EPV depends on.

For the cost of capital, start where every discount-rate estimate should start: the risk-free rate, adjusted for the business's actual market sensitivity. The 10-year Treasury yield was running near 4.2% in early 2026. Clorox's beta — 0.54 on a five-year monthly basis — is low, consistent with a company selling bleach and trash bags rather than something cyclical. Apply a 4.0% equity risk premium and r comes out to roughly 6.4%.

Clorox EPV, Fiscal 2026 Adjusted diluted EPS = $5.53 (down 28% from $7.72 in fiscal 2025) r = 4.2% risk-free rate + (0.54 beta × 4.0% equity risk premium) ≈ 6.4% EPV per share = $5.53 / 0.064 ≈ $86

Clorox closed at $105.70 on August 14, 2026 — about 22% above that EPV estimate. That gap is the actual information here. Either the market has decided fiscal 2026's organic softness was a cyclical air pocket rather than the new normal, or it's already crediting GOJO with more than the roughly three months of results baked into the $5.53 figure, or both. EPV doesn't resolve that question. It isolates it, by telling you exactly how much of today's price a flat, no-growth version of the business would justify on its own — and how much is riding on an improvement nobody has proven yet. Price is what Clorox trades for on a given Tuesday. Value, in this framework, is what the earnings power alone is worth, independent of that day's quote, and right now the two aren't close.

I'll admit I'm not fully confident which story is doing more work. GOJO's own revenue grew at roughly a 5% annual clip over the three years preceding the deal, per the acquisition disclosures, which argues for some real contribution once it's fully annualized into Clorox's results. But a single quarter of consolidated numbers is thin evidence for how durable that growth stays once it's folded into a much larger company, and I'd want at least two more quarters of combined reporting before trusting a normalized figure built on GOJO's trendline rather than management's own guidance.

Where the Zero-Growth Assumption Breaks Down

Run the same exercise on a business that's still reinvesting at high returns and EPV starts to mislead you. Take a scaled retailer or subscription business plowing free cash flow into new locations, new markets, or new capacity at returns on incremental capital that comfortably clear its cost of capital — Costco fits that description, and so does any number of less obvious compounders quietly reinvesting most of what they earn.

Greenwald was explicit about this limitation in his own work: EPV measures what a business is worth assuming it stops reinvesting productively starting today. That's a fair assumption for a mature consumer-staples portfolio. It's a badly wrong one for a business still finding profitable places to put new capital, because the zero-growth assumption throws away the single largest source of that business's actual value — the reinvestment runway itself. Apply EPV to a genuine compounder and you'll get a number that looks conservative and margin-of-safety-friendly. It's actually just incomplete.

And the failure isn't symmetric. Understating a compounder's value by treating it like a mature business is an error of omission — annoying, but rarely dangerous, since you'll simply pass on a good investment rather than make a bad one. Applying a growth-friendly DCF to a business that's actually done growing is the more expensive mistake, because it tells you to pay for years of earnings that were never coming.

Using EPV as a Cross-Check, Not a Verdict

None of this makes EPV useless outside its comfort zone — it just changes the job it's doing. Run EPV alongside a full DCF or a reverse-DCF and the gap between the two numbers becomes informative on its own. A wide gap means the price is leaning heavily on assumptions about years that haven't happened yet — which, on the numbers above, is a fair description of where Clorox sits right now. A narrow gap means the market has already concluded there isn't much of that bet left to make.

This is close to the same instinct behind owner earnings as a valuation input: start from a number you actually trust, then be explicit about what assumptions you're layering on top of it. EPV just takes that discipline to its logical extreme by refusing to layer anything on top at all.

So the point of running EPV isn't to pick a winner between it and a full DCF. It's to know which one you're implicitly trusting whenever you skip the comparison — and to remember that either number is a compass bearing, not a GPS coordinate. Read alongside a proper margin of safety, the gap between the two methods tells you more than either one does alone.

Key Takeaways

• Earnings Power Value = normalized after-tax earnings ÷ cost of capital, with no growth term — it prices a business as though today's sustainable earnings continue unchanged, forever.
• Applied to Clorox's fiscal 2026 numbers (adjusted EPS of $5.53, down 28% year over year, at a ~6.4% discount rate), EPV lands near $86 a share — about 22% below the stock's $105.70 close on August 14, 2026, with the gap reflecting bets on an organic-sales recovery and a fuller contribution from the recently closed GOJO acquisition.
• EPV is close to the truth for mature, capital-light businesses that have genuinely stopped reinvesting. It systematically understates value for genuine compounders still deploying capital at high incremental returns.
• Use EPV as a cross-check against a full DCF, not a replacement for one. The size of the gap between the two numbers tells you how much of the price is a bet on growth that hasn't happened yet.