The capitalized earnings method (also EBIT method (EBIT for "earnings before interest and taxes")) is one of the most common methods among the various methods of calculating company value. The capitalized earnings method according to IDW S1 is based on the IDW standard, i.e. the specifications of the Institut der Wirtschaftsprüfer in Deutschland e. V. (Institute of Public Auditors in Germany).
In this method, future profits are calculated on the basis of a budgeted profit and loss account, before these profits are discounted up to a specified valuation date. According to the capitalized earnings method according to IDW S1, the goodwill is not derived from the current situation of the company, but by means of the future potentials (the profits generated in the future). In this procedure, the central question is how quickly the purchase price can be offset by future profits. In this context, first the average profit of the last years is calculated, which serves as a starting point for the planning of future earnings and cash flows. Subsequently, the expected surpluses or profits are discounted using the capitalization rate to determine the enterprise value.
The determination of the capitalized earnings value according to IDW S1 is thus based on the principle of future-oriented valuation. By not only considering past values, it is ensured for the buyer that the purchase price does not exceed the expected profits.