Earnings Value Method vs. DCF: Two Routes to Company Value

The earnings value method (in German: Ertragswertverfahren) and DCF answer the same question — what a company will earn in the future — by two methodologically different routes. Both are income-based methods and, when applied cleanly, produce similar results.

Anyone holding a valuation should know which method lies behind it and why the figure reacts so sensitively to assumptions. This article frames both methods and shows when each fits.

The shared core idea

Both methods follow the same thought: the value of a company derives from what it will earn in the future — discounted to the present day. A euro in five years is worth less today than a euro in hand, and the risk that it never arrives lowers the value further.

The difference lies in the detail: which figure is discounted, and at what rate?

The earnings value method

The earnings value method is traditionally rooted in the German-speaking region and is the basis of many formal expert opinions, for instance under the IDW S1 standard. It discounts the future distributable earnings — simplified, the sustainably achievable surpluses — at a capitalisation rate.

Its strength is its closeness to the commercial-law income statement and to expert practice. It is often used where an objectified, comprehensible value is required — for settlements, inheritance disputes or corporate-law occasions.

The DCF method

The discounted cash flow method (DCF) is the international standard, especially in transactions. It discounts not earnings but free cash flows — that is, what can actually flow to capital providers after investments. The rate is the weighted average cost of capital (WACC), combining the cost of equity and debt.

DCF also distinguishes between the entity approach (value of the whole company, then deduction of net financial debt) and the equity approach (directly the value of equity). Its strength is transparency: investments, working capital and capital structure are modelled explicitly.

Where they differ

	Earnings value method	DCF
Reference figure	Distributable earnings	Free cash flows
Discount rate	Capitalisation rate	WACC (weighted cost of capital)
Origin / standard	DACH, IDW S1	International, transaction-standard
Typical occasion	Expert opinions, corporate law	M&A, investors
Modelling	closer to the income statement	explicit: investments, working capital, capital structure

In substance the two are close: with consistent assumptions they lead to comparable values. They are not opposites but two languages for the same idea.

What both share: the assumptions decide

This is the most important point — and the biggest source of error. Both methods are only as reliable as the assumptions that go into them: the earnings or cash-flow forecast and the discount rate.

Small changes have a large effect. A discount rate higher by one percentage point, or a slightly more optimistic growth assumption, shifts the result considerably. A DCF or earnings-value calculation is therefore not an objective fact but a model — whose assumptions can be argued over, and are argued over in the negotiation.

When to use which method

If an objectified value for an expert opinion or a corporate-law occasion in the DACH region is needed, the earnings value method is often the obvious route. If it is a transaction with national or international investors, the other side will usually expect a DCF model.

In practice, the income-based value is in any case cross-checked against a market multiple — and in the end it is not the formula that counts but what a buyer is willing to pay. How the methods fit into the bigger picture is set out in "Company valuation: methods, occasions and what drives value"; the quick overview is in "What is my company worth?".

The real value is created in the negotiation, not in the formula. For a realistic, independent assessment: IGCP Capital Partners. → igcp.at

Frequently Asked Questions

What is the difference between the earnings value method and DCF?

Both discount future earning power, but use different figures: the earnings value method discounts distributable earnings at a capitalisation rate, DCF discounts free cash flows at the weighted average cost of capital (WACC). The earnings value method is rooted in DACH expert practice, DCF is the international transaction standard.

Do both methods give the same value?

With consistent assumptions both lead to comparable results — they are methodologically related. Differences arise mainly from diverging assumptions on forecast, discount rate and capital structure, not from the method itself.

Which method is the right one?

It depends on the occasion: for objectified expert opinions and corporate-law cases in the DACH region often the earnings value method, for M&A transactions with investors usually DCF. In practice a market multiple complements both as a reality check.

Why does company value vary so much with the assumptions?

Because both methods discount future figures, even small changes in growth or discount rate strongly affect the result. A valuation is therefore a model with assumptions, not an objective fact — and these assumptions are a central point of every negotiation.