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What is Earnings Power?

Earnings power is mostly a concept that investors talk about rather than a quantifiable amount, but there is a Basic Earnings Power (BEP) ratio that some analysts use.

BEP is the EBIT (earnings before interest and taxes) of a company divided by its total assets (net assets), which is also called Return on Total Assets (ROTA). Earnings power is similar to the concept of staying power when most investors use it; a company that has had strong earnings and growth, and that seems to have the skill and resources to keep earnings up well into the future, is said to have earnings power.

For more information on ROTA, see “What is Return on Net Assets?

EBIT adds taxes and interest costs back into earnings to see how a company is doing before these two liabilities, which can fluctuate depending on the political and banking environment, are taken out. Earnings, also called net income, is one of the most important metrics for a company and its investors, as it represents the bottom line of the company.

Projections of future earnings are regularly given by industry analysts and the company itself, and BEP/ROTA may be a part of that conversation.

Keywords: return on assets (ROA), bottom line, Basic Earnings Power (BEP),