Earnings Power Value: The 2025 Guide for Australian Investors

Earnings Power Value (EPV) is gaining renewed attention as Australia’s share market enters a new phase of higher interest rates, shifting government policy, and fast-moving corporate earnings. For investors seeking clarity amid volatility, EPV offers a grounded, no-nonsense approach to understanding what a company is truly worth—right now.

Why Earnings Power Value Matters in 2025

2025 is shaping up as a year of transition for Australian investors. The ASX is still digesting the aftershocks of 2023–24’s inflation cycle, while new Labor government corporate tax tweaks and the RBA’s revised interest rate strategy have upended old valuation models. In this environment, forward-looking estimates can be unreliable. That’s where EPV shines: it values a company based on its current, sustainable earnings, not on speculative forecasts.

• Market volatility: With profit margins swinging, consensus forecasts often miss the mark.

• Policy changes: The 2025 federal budget increased the corporate tax rate for large multinationals, impacting forward earnings estimates.

• Interest rate resets: Higher discount rates mean future cash flows are worth less—making a focus on current earnings even more critical.

How EPV Works: The Nuts and Bolts

At its core, EPV calculates what a business is worth if it simply continues to generate its current level of after-tax earnings, with no growth. It strips away the noise of projections and focuses on the here and now. The formula is simple:

EPV = Adjusted Earnings / Cost of Capital

Let’s break this down:

• Adjusted Earnings: Start with after-tax operating profit. Remove unusual, non-recurring items. Normalise for any one-off expenses or windfalls.

• Cost of Capital: In 2025, the average ASX company faces a higher cost of equity (often 8–10%) after the RBA’s rate hikes. This figure matters—a lot.

Example: Suppose Woolworths has normalised after-tax operating profit of $2 billion, and its cost of capital is now 9%. Its EPV is $2b / 0.09 = $22.2 billion. If Woolworths trades at $18 billion on the ASX, it may be undervalued on an EPV basis.

EPV in Action: Real-World Uses and Limitations

EPV can be a powerful filter for Australian investors, especially for mature, steady businesses. Here’s how it’s being used in 2025:

• Screening for bargains: Value investors are using EPV to spot stocks trading below their sustainable earnings value—ignoring blue-sky growth stories.

• Cutting through hype: In sectors like mining or tech, where earnings can be lumpy, EPV helps investors avoid getting caught up in temporary booms.

• Setting a floor price: EPV gives a baseline value, useful for M&A and private equity dealmaking.

However, EPV isn’t perfect:

• It ignores future growth—great for mature companies, less useful for high-growth disruptors.

• It assumes current earnings are sustainable. If a company is at a cyclical peak or trough, EPV can mislead.

• Cost of capital estimates can vary, affecting comparability.

EPV and the 2025 Australian Investment Playbook

With the Albanese government introducing new franking credit rules and the RBA maintaining higher-for-longer rates, Australian investors are rethinking their approach. EPV is emerging as a go-to tool for those looking to:

• Compare stocks on a level playing field

• Avoid overpaying for hope and hype

• Make disciplined, data-driven investment decisions

For example, in the 2025 reporting season, several ASX retailers were punished for missing growth targets—but their EPV analysis suggested some were still solid value plays, provided earnings held steady.