What is Earnings Power?
Earnings power is the ability to generate profits.
How Does Earnings Power Work?
Company XYZ is a start-up that sells pet rocks. At first, the company sells 40,000 units after a celebrity is photographed taking hers to a movie set. The company makes $500,000 of. Over the next year, the company sells an additional 50,000 units, but because the celebrity enters rehab and people eventually figure out that they can make their own pet rocks, the company only sells 1,000 units per year for the next two years.
Because the company was so dependent on celebrity approval and only offered a "fad" product, Company XYZ does not have earnings power. That is, the company's business model is unlikely to generate steady, consistent profits over time.
Why Does Earnings Power Matter?
When analysts look at earnings power, they typically look for long-term earnings power -- that is, the ability to survive for a long time.
Personalized Financial Plans for an Uncertain Market
In today’s uncertain market, investors are looking for answers to help them grow and protect their savings. So we partnered with Vanguard Advisers -- one of the most trusted names in finance -- to offer you a financial plan built to withstand a variety of market and economic conditions. A Vanguard advisor will craft your customized plan and then manage your savings, giving you more confidence to help you meet your goals. Click here to get started.
Read This Next
With every passing year, the nation's social security system looks increasingly shaky. Today'...Read More →
A new client recently came into my bank branch with a check for $10,000... he was ready to invest. He sat down in my office and told me that he wanted to buy gold. We don't sell gold...Read More →
What easier way to bring in income than with rental property, right? Check in on the tenants periodically, stay on top of the repairs and watch the...Read More →