FactorSage

Intrinsic Value · Lesson 1.4

Residual Income valuation

Residual Income valuation starts from book value and adds the present value of all future profits earned above the cost of equity.

The core idea

A business that earns exactly its cost of equity is worth its book value. Anything earned above that is residual income and adds value. Anything earned below destroys value.

Value = Book Value + Σ (ROE − Cost of Equity) × Book Value / (1 + r)^t

When this model fits

  • Financial businesses where book value is economically meaningful.
  • Companies with stable return on equity and a clear cost-of-equity benchmark.
  • As a cross-check on DCF when free cash flow is volatile.

Residual Income in FactorSage

Available as RESIDUAL_INCOME_VALUE (annual, Starter+) and RESIDUAL_INCOME_VALUE_TTM (Pro). Combine it with DCF or Owner Earnings to avoid relying on a single set of assumptions.

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