DEFINITION of 'Capitalization Of Earnings'
A method of determining the value of an organization by calculating the net present value (NPV) of expected future profits or cash flows. The capitalization of earnings estimate is done by taking the entity's future earnings and dividing them by the capitalization rate (cap rate). This will take into account the risk that earnings will stop or be lower than the estimate.
Where:
d = discount rate
g = growth rate
INVESTOPEDIA EXPLAINS 'Capitalization Of Earnings'
This is an incomevaluation approach that determines the value of a business by looking at the current benefit of realizing a cash flow now, rather than in the future. The capitalization of earnings is particularly useful when the future earnings can be predicted easily and accurately.
For example, if a company had a business that made $1.2 million last year and that was expected to grow at a 4% rate (plus a 3.25% inflation rate), the annual rate of return needed by a purchaser given the level of risk would be 26%. Expected value using the capitalization of earnings method would be $6.4 million, calculated as:
$1,200,000/ (0.26  (.04+.0325))
$1,200,000/0.1875
$6.4 million

Net Present Value  NPV
The difference between the present value of cash inflows and ... 
Discounted Cash Flow  DCF
A valuation method used to estimate the attractiveness of an ... 
Capitalization Rate
A rate of return on a real estate investment property based on ... 
Cash Flow
1. A revenue or expense stream that changes a cash account over ... 
Asset Valuation
A method of assessing the worth of a company, real property, ... 
Earned Premium
The amount of total premiums collected by an insurance company ...

Fundamental Analysis
Discounted Cash Flow Analysis
Find out how analysts determine the fair value of a company with this stepbystep tutorial and learn how to evaluate an investment's attractiveness for yourself. 
Investing
Using DCF In Biotech Valuation
Valuing firms in this sector can seem like a black art, but there is a systematic way to pin a price on potential. 
Fundamental Analysis
Top 3 Pitfalls Of Discounted Cash Flow Analysis
The DCF method can be difficult to apply to reallife valuations. Find out where it comes up short. 
Markets
Intangible Assets Provide Real Value To Stocks
Intangible assets don't appear on balance sheets, but they're crucial to judging a company's value. 
Budgeting
Which is a better measure for capital budgeting, IRR or NPV?
In capital budgeting, there are a number of different approaches that can be used to evaluate any given project, and each approach has its own distinct advantages and disadvantages.All other ... 
Markets
Understanding Economic Value Added
Discover the simplicity of this important valuation metric. We reveal its underlying ideas and examine each of its components. 
Fundamental Analysis
What is a bad interest coverage ratio?
Understand how interest coverage ratio is calculated and what it signifies, and learn what market analysts consider to be an unacceptably low coverage ratio. 
Fundamental Analysis
What is the difference between a capital gearing ratio and a net gearing ratio?
Understand the definition of gearing in the finance industry, the difference between net gearing and capital gearing ratios and how they are interpreted. 
Fundamental Analysis
What is the difference between interest coverage ratio and DSCR?
Understand the basics of the interest coverage ratio and the debtservice coverage ratio, including calculations and how each type reflects financial stability. 
Investing Basics
What is the difference between interest coverage ratio and TIE?
Read about the times interest earned, also known as the interest coverage ratio. Find out why this is an important ratio for investors and creditors.