The ability of a business to generate earnings from its core operating activities. Since earnings eventually translate into free cash flow for the owners, earnings power is a useful concept for investors trying to value a business. To arrive at the earnings power of a business, investors usually take a look at the historical earnings record of the business and then adjust it for the effect of extraordinary, one-off items — thus getting a fair idea of its probable future earnings. Adjusted earnings can thus present a better picture to investors of the ability of a business to sustain its earnings record.
