Asset Earning Power - AEP

You know the term asset from the balance sheet. Yes, it's the stuff on the left if you missed class that day. Its earning power is a calculation of pre-tax earnings divided by total assets.

The "why should I care" overlay here is that some industries and/or companies operate with capital needs very different from one another. Extremely high contribution margin companies who don't have tons of fixed costs or massive initial capital needs can have extremely high asset earning powers. You find those companies dotted along the periphery of Stanford University, where all of their assets are intellectual assets, and they make computer software.

Google, with only one hundred million dollars of assets, created a company with some half a billion dollars of earnings power just a few years later. Extremely efficient asset and industry there. The opposite is an industry like the paper and pulp biz, with enormous capital cost, government regulatory maintenance, and other elements compressing earnings relative to very high cost total assets.