Earnings Power

AAA

DEFINITION of 'Earnings Power'

A business's ability to generate profit from conducting its operations. Earnings power is used to analyze stocks to assess whether the underlying company is worthy of investment. Possessing greater long-term earnings power is one indication that a stock may be a good investment.

INVESTOPEDIA EXPLAINS 'Earnings Power'

Many metrics are used to solely determine a company's earnings power. For example, analyzing a company's return on assets (ROA) and return on equity (ROE) determines the company's ability to generate profit from its assets and shareholder's equity, respectively.

Individual sectors or industries may place greater importance on certain metrics for earnings power purposes compared to others. For example, the dividend yield may be more relevant for a long-lived blue chip company compared to a rapidly growing start-up, because the start-up will more likely be investing its money back into the firm to sustain its growth rather than dispensing dividends.

RELATED TERMS
  1. Return On Equity - ROE

    The amount of net income returned as a percentage of shareholders ...
  2. Earnings

    The amount of profit that a company produces during a specific ...
  3. Fundamental Analysis

    A method of evaluating a security that entails attempting to ...
  4. Profit

    A financial benefit that is realized when the amount of revenue ...
  5. Dividend

    1. A distribution of a portion of a company's earnings, decided ...
  6. Return On Assets - ROA

    An indicator of how profitable a company is relative to its total ...
Related Articles
  1. Timeless Ways To Protect Yourself From ...
    Home & Auto

    Timeless Ways To Protect Yourself From ...

  2. Trader's Corner: Finding The Magic Mix ...
    Options & Futures

    Trader's Corner: Finding The Magic Mix ...

  3. Introduction To Fundamental Analysis
    Markets

    Introduction To Fundamental Analysis

  4. Payroll Deductions Pay Off
    Retirement

    Payroll Deductions Pay Off

comments powered by Disqus
Hot Definitions
  1. Takeover

    A corporate action where an acquiring company makes a bid for an acquiree. If the target company is publicly traded, the ...
  2. Harvest Strategy

    A strategy in which investment in a particular line of business is reduced or eliminated because the revenue brought in by ...
  3. Stop-Limit Order

    An order placed with a broker that combines the features of stop order with those of a limit order. A stop-limit order will ...
  4. Pareto Principle

    A principle, named after economist Vilfredo Pareto, that specifies an unequal relationship between inputs and outputs. The ...
  5. Pareto Principle

    A principle, named after economist Vilfredo Pareto, that specifies an unequal relationship between inputs and outputs. The ...
  6. Budget Deficit

    A status of financial health in which expenditures exceed revenue. The term "budget deficit" is most commonly used to refer ...
Trading Center