Excess Earnings


Excess earnings are the profits a company makes that go beyond a reasonable return on its tangible assets. These earnings are attributed to intangible assets like brand value or intellectual property. Excess earnings are important in business valuation as they capture the additional value provided by these intangible assets. It helps assess the company’s overall worth and potential for future earnings. Determining excess earnings involves separating the impact of tangible and intangible assets on a company’s earnings.

Further Explanation

Excess earnings, in the context of business valuation, refer to the earnings or profits generated by a company that exceed a reasonable return on the company’s net tangible assets. It represents the income or cash flow that can be attributed to intangible assets, such as brand value, customer relationships, patents, or intellectual property, which are not directly reflected in the company’s tangible assets.

The concept of excess earnings is commonly used in valuation methods that aim to determine the value of a business beyond its net tangible assets, such as the excess earnings method. This method calculates the value of a business by estimating the expected future excess earnings and applying an appropriate capitalization rate or discount rate.

Excess earnings can be seen as the portion of a company’s earnings that is attributable to its intangible assets and the competitive advantage it possesses. It represents the additional value that these intangible assets bring to the company’s financial performance.

By identifying and quantifying the excess earnings, a business valuation can capture the value of intangible assets that contribute to the company’s profitability. This allows for a more comprehensive assessment of the company’s worth and potential for future earnings.

It’s worth noting that determining excess earnings involves judgment and estimation, as it requires separating the impact of tangible and intangible assets on a company’s earnings. Various valuation techniques and approaches can be employed to assess and quantify excess earnings, depending on the specific circumstances and purpose of the valuation.

In summary, excess earnings represent the earnings or cash flow generated by a company that exceeds a reasonable return on its tangible assets. It captures the value contributed by intangible assets and is important in valuing a business beyond its physical assets.

Why Appoint Valtech as Valuation Adviser?

Valtech’s team has provided valuation advice to over 200 listed companies in Hong Kong, China, Singapore, Taiwan, Australia, the United Kingdom, the United States and Germany.

Valtech Valuation is a professional valuation firm accredited with ISO-9001 in valuation advisory services. The financial market and valuation requirements are highly dynamic. We are determined to develop and maintain a quality management system to foster an environment which is sustainable and evolving continuously. Our founders stress on development of a system and an environment that our consultants are provided with necessary support and opportunities to thrive.

We are a team of professionals from multiple disciplines including audit, financial modelling, tax, internal control and surveying. Our management adheres professional excellence. Abundant resources are reserved to develop standardized policies and procedures for quality control. We have solid track record in valuation advisory for listed companies, private equity, fund managers and financial institutions. We work closely with big four and other international accounting firms, corporate financial advisors, fund managers and legal advisors.

Valtech Advantages:

Advanced Valuation Techniques: Valtech Valuation can develop and implement advanced valuation techniques that are specifically tailored to the needs of clients. These techniques can go beyond traditional valuation methods and incorporate factors such as market trends, industry benchmarks, and risk analysis to provide more accurate and insightful valuations.

Customized Valuation Models: Valtech Valuation can create customized valuation models that align with the unique investment strategies and asset classes. By understanding the specific requirements and objectives of these entities, Valtech Valuation can develop models that capture the nuances of their portfolios, resulting in more precise and relevant valuations.

Data-driven Insights: Valtech Valuation can leverage its access to comprehensive data sources and analytics tools to provide data-driven insights. By analyzing market data, economic indicators, and performance metrics, Valtech Valuation can offer valuable insights into the valuation of assets, identify emerging trends, and help inform investment decision-making.

Adherence to Compliance and Reporting Standards: Valtech Valuation can ensure that valuation practices adhere to regulatory compliance and reporting standards. By staying updated on relevant regulations, such as accounting standards and industry guidelines, Valtech Valuation can help clients meet their reporting obligations accurately and in a timely manner.