Capitalized Excess Earnings Method

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Definition: Capitalized Excess Earnings Method

Capitalized Excess Earnings method is a financial valuation method that computes value of a business by summation of net tangible assets and the capitalized value of excess earnings, which can be attributed to intangibles like reputation.



  • Find out net tangible assets of a business (can be obtained by financial statements).
  • Determine the earnings attributable to those assets by multiplying the value with the reasonable rate of return.
  • Compute ‘excess earnings’ as difference between actual business earnings and that by net assets. This difference can be attributed to non tangible assets like goodwill.
  • Capitalize the value computed using an appropriate capitalization rate, to determine fair market value of the intangibles.


Shivraj Enterprises has net tangible assets worth Rs. 5,000,000. Rate of return on tangible assets is 10%, and rate of return on intangibles is 20%. Income before taxes is Rs. 800,000 for that year.

According to procedure mentioned above,

Tangible assets = 5,000,000

Earnings attributable = 5,000,000 * 10%

= 500,000

Excess earnings = Total earnings – earnings attributable to tangibles

= 750,000 – 500,000

= Rs. 250,000

Capitalized value = 250,000 / 20%

= Rs. 1,250,000


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