Income Approach

The income approach to business valuation values a company by estimating some measure of its earning power in the future and converting that measure to a present value based on an investor's required rate of return on the investment considering the risk of the investment.

The measure of earning power most frequently used is "net cash flow", which represents the amount that an owner could take out of the business over time without jeopardizing it as a going concern. For a business with no long-term debt, net cash flow is calculated as:

Net income.

Plus noncash charges (depreciation, amortization, etc.).

Minus capital expenditures.

Minus additions to working capital.