Earnings Power

What is 'Earnings Power'

Earnings power is 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.

BREAKING DOWN '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.

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