Asset Earning Power (AEP)

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 instance, 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.

Commonly, the higher the asset earning power ratio a company includes relative to others inside its industry, the more efficient it is at generating cash flow from its asset base. Since asset earning power considers earnings before taxes, it is valuable for contrasting firms and different tax circumstances.

A comparative and more normal performance measure in corporate finance measure is the fundamental earning power ratio, what separates earnings before interest and taxes (EBIT) by total assets. This is helpful for contrasting firms and various degrees of leverage as well as tax rates.