Systematic & Quantitative Valuation
Value Investing: From Graham to Buffett and Beyond
Greenwald splits a company's value into three layers ranked by how much you can trust them: what the assets would cost to rebuild, what today's earnings are worth with no growth, and only then what growth adds. Most of the work is in the first two.
The big picture
The book grew out of the value-investing course Bruce Greenwald taught at Columbia Business School. Its core bet is that a forecast is only as good as its least reliable input, so valuation should be built in layers from the most certain to the least. Layer one is asset value: what a new entrant would have to spend to rebuild the business today. Layer two is earnings power value (EPV): current, cleaned-up operating profit treated as if it never grows, divided by the cost of capital. Layer three is growth, and it only counts if the company earns more on new capital than that capital costs. Comparing layer one with layer two is the franchise test: when earnings power sits well above rebuild cost, something is keeping competitors out, and the analyst has to name it.
The first edition (2001, Wiley) was written with Judd Kahn, Paul Sonkin and Michael van Biema. A substantially rewritten second edition followed in 2020 with Judd Kahn, Erin Bellissimo, Mark Cooper and Tano Santos. Why it matters now: in an AI market where most of a price is growth, a method that values growth last, and often at zero, shows how much of a quote rests on the least certain layer.
The 3 strategic pillars
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Asset value at reproduction cost
Start with the balance sheet, restated to what a competitor would pay to recreate each item today, not what the books say.
Receivables and inventory are adjusted for collectibility and replacement cost, plant for current prices, and intangibles that never hit the balance sheet (brand, customer base, R&D) are added back at roughly what it cost to build them. In a declining industry, liquidation value replaces reproduction cost.
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Earnings power value
Value today's sustainable earnings as a flat perpetuity: no growth assumed, so no growth forecast can be wrong.
Normalize operating profit over a cycle, tax it, add back depreciation above the capex needed just to stay the same size (maintenance capex), then divide by the cost of capital. Excess cash is added, debt subtracted, to reach equity value.
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Franchise test and value of growth
Growth creates value only behind a barrier to entry; without one, new capital earns its cost and growth is worth nothing.
EPV close to asset value means no moat, so growth adds nothing. EPV well above asset value means a franchise, and growth is worth R/(R − g) × (1 − g/ROC) times EPV, where ROC is the return on new capital. When ROC equals the cost of capital R, that ratio is exactly 1.
What a Closelooknet reader does with it
The working use is to decompose any quote into the three layers and see which one it depends on. If the price is below asset value, the case rests on the most tangible layer. If it is between asset value and EPV, it rests on the franchise being real. If it is above EPV, part of the price is a bet on growth, and the growth formula shows how much return on new capital that bet requires. The mistake this prevents is paying for growth in a business with no barrier to entry, where competition drives returns on new investment down to the cost of capital and the growth creates no value for owners.
The bridge to the Closelooknet approach
This book sits between two entries already on the shelf. The Intelligent Investor supplies the margin of safety; Greenwald supplies a more structured estimate of the value that margin is measured against. The Little Book That Still Beats the Market ranks on return on capital; Greenwald explains when a high return on capital can last, which is only behind a moat. On Closelooknet, the quality module of the Company Scoring System reads the same signal as the franchise test from the other side, via persistent ROIC. The maintenance-capex step matters most for AI infrastructure, where AI hardware depreciation decides how much of reported profit is really distributable. The Valuation Gap framework applies the asset-versus-price comparison at the market level.
Action-Kit — from theory to practice
Tooling & data
| What you need | Where to get it | Cost |
|---|---|---|
| Ten-year income statement, balance sheet and cash flow Normalized EBIT, D&A, capex, PP&E and sales history for the EPV and maintenance-capex steps | stockanalysis.com (financials tab) or SEC EDGAR annual filings Normalize over a full cycle; one peak year overstates earnings power. | Free |
| Cost of capital inputs Risk-free rate, equity risk premium and industry betas for the WACC divisor | Aswath Damodaran's data pages (NYU Stern) Updated each January; industry averages are a reasonable default when a company-specific beta is noisy. | Free |
| Company filings with footnotes Reproduction adjustments: receivable allowances, inventory method (LIFO reserve), lease and pension liabilities, R&D and SG&A history | SEC EDGAR full-text search For non-US names, the issuer's investor-relations annual report carries the same notes. | Free |
The formulas
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Reproduction asset value
AV = Σ (book value_i × adjustment_i) + rebuilt intangibles − non-interest-bearing liabilities- book value_i — each balance-sheet asset line
- adjustment_i — factor to today's rebuild cost (e.g. 0.95 for receivables, 1.0–1.2 for older plant)
- rebuilt intangibles — e.g. 1–3 years of SG&A for customer base, 3–5 years of R&D for know-how
The result is enterprise-level rebuild cost; compare it with EPV before debt and excess cash.
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Earnings power value
EPV = [EBIT_norm × (1 − t) + (D&A − maintenance capex)] / WACC- EBIT_norm — operating profit averaged over a cycle
- t — normalized tax rate
- maintenance capex = total capex − (PP&E / sales) × Δsales
- WACC — weighted average cost of capital
Equity EPV = EPV + excess cash − debt. No growth is assumed anywhere in the formula.
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Franchise test
Franchise value = EPV − AV; franchise ratio = EPV / AV- EPV — earnings power value
- AV — reproduction asset value
A ratio near 1 means no barrier to entry. A ratio well above 1 needs a named source: captive customers, scale economies or cost advantage.
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Value of growth ratio
V_growth / EPV = R / (R − g) × (1 − g / ROC)- R — cost of capital
- g — sustainable growth rate, g < R
- ROC — return on new invested capital
Equals 1 when ROC = R (growth adds nothing), falls below 1 when ROC < R, and rises above 1 only behind a franchise.
Applied Pack · free members
Greenwald Applied Pack
The three-layer valuation as a working Excel model and a Python ranker: rebuild cost, earnings power, franchise test and the value of growth, run on your own numbers.
- Greenwald_EPV_Calculator.xlsx — asset value at reproduction cost, earnings power value with maintenance capex and WACC, franchise check, value-of-growth ratio and margin of safety against price, all live formulas with amber input cells
- greenwald_epv.py — stdlib-only script: fundamentals CSV in, table ranked by margin of safety out, with asset value, EPV, franchise ratio and growth value per row
- fundamentals_sample.csv — example input with EXAMPLE_ rows showing the expected columns
- README.txt — inputs, how to run, and the educational-use disclaimer
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Educational templates — a research diary companion, not investment advice.
Closelooknet publishes a market diary, not investment advice. This condensed read restates the book's ideas in our own words for education — for the author's full argument, go to the source.