DEFINITION of Asset Earning Power (AEP)
Asset earning power (AEP), which measures the earnings power of a business relative to its asset base, is a profitability ratio. Asset earning power is calculated as:
Asset Earning Power = Earnings Before Taxes/Total Assets
Understanding Asset Earning Power (AEP)
Asset earning power (AEP) is a measure of how efficiently a company is at generating income from its operations.
For example, a company that reports earnings before taxes of $75 million, while carrying total assets on its balance sheet of $25 million, would have an asset earning power ratio of 3.0 times.
Typically, the higher the asset earning power ratio a company has relative to others within its industry, the more efficient it is at generating cash flow from its asset base. Because asset earning power considers earnings before taxes, it is useful for comparing firms with different tax situations.
A similar and more common performance measure in corporate finance measure is the basic earning power ratio, which divides earnings before interest and taxes (EBIT) by total assets. This is useful for comparing firms with different degrees of leverage as well as tax rates.