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NISM-Series-XV: Research Analyst · Valuation Principles

Asset-Based, SOTP, Residual Income and EVA Valuation

Updated 11 October 2026 · Fact-checked

These approaches value a firm without relying only on discounted cash flows. Asset-based methods use net asset value or replacement cost. Sum-of-the-parts adds up separate business values. Residual income and EVA value a firm by the profit earned above the charge for capital. Learn each formula and when it suits.

Understand Asset-Based and Other Valuation Approaches

Most valuation questions use DCF or multiples. This topic covers other approaches. Each one suits a particular type of business or situation.

Asset-based valuation asks what the firm's assets are worth after you deduct its liabilities. Net asset value (NAV) = value of assets − value of liabilities. Divide by the number of shares to get NAV per share. You can use book values or fair (market) values of assets. Fair values are better, because book values can be stale. This approach suits asset-heavy firms, holding companies, real estate and investment firms, and firms being liquidated or wound up. It suits poorly a firm whose value comes from brands, people or growth, because those intangibles are often missing from the balance sheet.

Replacement cost asks what it would cost today to rebuild the firm's assets. If the market value of a firm is below the replacement cost of its assets, it may be undervalued. If it is far above, the firm may be earning high returns or competitors may be tempted to enter. Replacement cost is often compared with market value as a ratio, called Tobin's q in many texts.

Sum-of-the-parts (SOTP) values each business segment on its own, using a method suited to it (for example a different multiple for each segment). You add the segment values, add non-operating assets such as investments, subtract net debt and other claims, and get equity value. It suits conglomerates with unrelated businesses. Sometimes the total is lower than the whole is traded at, or higher. A higher SOTP value than market value is often called a conglomerate discount.

Residual income (RI) is the profit left after charging shareholders for the equity capital used. RI = net income − equity charge, where equity charge = cost of equity × beginning book value of equity. Equity value = current book value + present value of expected future residual incomes. It works for firms that pay no dividends or have negative free cash flow, because book value already captures much of the value.

Economic Value Added (EVA) is the same idea at the level of all capital. EVA = NOPAT − (WACC × capital invested). Positive EVA means the firm creates value. Negative EVA means it destroys value even if accounting profit is positive.

Key formulas to remember

Net asset value
NAV = Value of assets − Value of liabilities
Use fair values where available. NAV per share = NAV ÷ number of shares.
Replacement cost comparison
Market value of firm ÷ Replacement cost of assets
A ratio below 1 suggests the market values the firm below the cost of rebuilding its assets.
Sum-of-the-parts equity value
Equity value = Σ (segment values) + non-operating assets − net debt and other claims
Value each segment with a method suited to it.
Residual income
RI = Net income − (Cost of equity × Beginning book value of equity)
The deduction is the equity charge.
Residual income valuation
Equity value = Book value now + PV of future residual incomes
Discount residual incomes at the cost of equity.
Economic Value Added
EVA = NOPAT − (WACC × Invested capital)
NOPAT is net operating profit after tax. Positive EVA means value creation.

How to solve Asset-Based and Other Valuation Approaches questions

Use this method for any question on these approaches.

  1. 1Read the question and identify the approach named or hinted at: assets, parts, residual income or EVA.
  2. 2Note whether the question asks for a number, a formula, or when the approach suits.
  3. 3For NAV, list assets and liabilities at the values given (fair value if stated) and subtract.
  4. 4For SOTP, value each segment, add them, add non-operating assets, then subtract net debt.
  5. 5For RI or EVA, compute the capital charge first: rate × capital. Use the right rate (cost of equity for RI, WACC for EVA) and the right base.
  6. 6Subtract the charge from the profit measure (net income for RI, NOPAT for EVA).
  7. 7Check the sign and the units, then match the result to the options.
  8. 8For concept questions, match the approach to the firm type: asset-heavy, conglomerate, or no dividends and negative cash flow.

Quickest way: Match the approach, then one subtraction

When to use it: Use it when time is short and the question is either a match-the-situation or a simple calculation.

  1. Asset-heavy, holding or liquidation: pick NAV or replacement cost.
  2. Several unrelated businesses: pick SOTP.
  3. No dividends or negative free cash flow but stable book value: pick residual income.
  4. Value created above the cost of capital: pick EVA.
  5. For numbers, always do profit minus rate × capital, using the matching rate and base.

Common mistakes in Asset-Based and Other Valuation Approaches

  • Using WACC in residual income or cost of equity in EVA.

    Both formulas look alike: profit minus a charge.

    Fix: RI uses net income and cost of equity. EVA uses NOPAT and WACC.

  • Using ending book value for the equity charge in RI.

    Students take the latest figure on the balance sheet.

    Fix: Use the beginning-of-period book value unless the question says otherwise.

  • Forgetting to subtract net debt in SOTP.

    Segment values often come from enterprise value multiples, so they are firm values.

    Fix: If segment values are enterprise values, subtract net debt to reach equity value.

  • Using NAV for a brand-driven or high-growth firm.

    NAV is simple, so students apply it everywhere.

    Fix: NAV misses intangibles and growth. It suits asset-heavy firms and liquidation.

  • Treating positive accounting profit as positive EVA.

    Accounting profit does not charge for equity capital.

    Fix: Positive EVA needs NOPAT to exceed the full capital charge.

  • Mixing book value and fair value in NAV.

    Students use whichever figure is listed first.

    Fix: Use the values the question specifies, and prefer fair values when given.

Worked examples

Example 1

A firm has NOPAT of ₹60 crore, invested capital of ₹400 crore and WACC of 12%. Find its EVA and say whether it creates value.

Show the solution
  1. Capital charge = 12% × ₹400 crore = ₹48 crore.
  2. EVA = NOPAT − capital charge = ₹60 crore − ₹48 crore = ₹12 crore.
  3. EVA is positive, so NOPAT exceeds the charge for all capital.

Answer: EVA = ₹12 crore. The firm creates value.

Example 2

A company has two segments valued at ₹900 crore and ₹600 crore. It also holds investments worth ₹150 crore. Net debt is ₹450 crore and there are 10 crore shares. Find the SOTP value per share.

Show the solution
  1. Sum of segment values = ₹900 crore + ₹600 crore = ₹1,500 crore.
  2. Add non-operating investments: ₹1,500 crore + ₹150 crore = ₹1,650 crore.
  3. Subtract net debt: ₹1,650 crore − ₹450 crore = ₹1,200 crore equity value.
  4. Per share = ₹1,200 crore ÷ 10 crore shares = ₹120.

Answer: SOTP value per share = ₹120.

Exam tips

  • Expect match-the-approach questions: asset-heavy, conglomerate, no dividends. Learn the one-line fit for each method.
  • Check which rate goes with which profit: cost of equity with net income, WACC with NOPAT.
  • In SOTP, read whether segment values are enterprise or equity values before deducting debt.
  • Remember that wrong answers carry 25% negative marking, so skip only if you cannot narrow the options to two.

Practice questions from Valuation Principles

Asset-Based and Other Valuation Approaches in other exams

The same ground in other exams, if you are preparing for more than one or want another angle on it.

Asset-Based and Other Valuation Approaches: frequently asked questions

What is sum-of-the-parts valuation?

It values each business segment separately and adds the values. You then add non-operating assets and subtract net debt. It suits conglomerates with unrelated businesses.

How does residual income differ from DCF?

DCF discounts future cash flows to the firm or to equity. Residual income starts from current book value and adds the present value of profits above the equity charge. It is useful when dividends or free cash flow are not reliable.

What is the EVA formula?

EVA = NOPAT − (WACC × invested capital). A positive result means the firm earns more than its cost of capital.

When is asset-based valuation suitable?

It suits asset-heavy firms, holding or investment companies and firms facing liquidation. It is weak for firms whose value lies in intangibles or growth.