Courses / Earnings Power

Earnings Power

30 Lessons | 6 Quizzes

Earnings power refers to the business’s ability to generate profits. This course builds on top of the three previous courses on Corporate Valuation, Revenue Model and Cost Structure to develop an integrated understanding of how companies make money and how it impacts valuation. We’ll learn the different earnings metrics, how they drive companies’ stock prices, and how to forecast future earnings. By the end of this course, we’ll be able to use the knowledge we developed to estimate future stock price and gauge the return on our investment.

Key Takeaways:

  • Different earnings metrics and margins
  • Relationship with valuation and stock price
  • How to forecast earnings


1. What is Earnings Power


Earnings power describes a business's ability to generate profits.

2. GAAP vs. Non-GAAP


In this video, we'll learn the distinction of GAAP vs. non-GAAP earnings metrics.

3. Paper Profit vs. Cash Profit


In this video, we'll learn the distinction of paper profit vs. cash profit. Cash profit is a closer proxy to cash flow than paper profit.

4. Gross Profit


Gross Profit is the profit generated by the core products and services that the business sells. Gross Profit = Revenue - COGS.



EBIT is the total profit generated by the business operations. For this reason, it's also known as "Operating Income".



EBITDA is the cash profit generated by the business operations.

7. Adjusted EBITDA


Adjusted EBITDA adjusts EBITDA for non-recurring items as well as additional non-cash items. Adjusted EBITDA = EBITDA ± Adjustments.

8. Pre-Tax Income


Pre-Tax Income measures the company’s earnings to shareholders before taxes.

9. Net Income


Net Income measures the company’s earnings to shareholders after paying for all expenses. Net Income = Pre-Tax Income - Income Tax Expense.

10. Weighted Average Shares Outstanding (WASO)


Weighted Average Shares Outstanding (WASO) measures the average shares outstanding during the reporting period, weighted by duration.

11. Earnings per Share (EPS)


Earnings per Share ("EPS") measures the company’s earnings attributable to each stock, after paying for all expenses.

12. Adjusted EPS


Adjusted EPS adjusts EPS for non-recurring items. For many companies, Adjusted EPS is the most important metric that drives stock price.

13. Adjusted EBITDA vs. Adjusted EPS


In this video, we'll learn the relationship between Adjusted EBITDA and Adjusted EPS.

14. Run-Rate


In this video, we'll introduce the concept of run-rate earnings.

15. Profit Margins


Profit Margins measure the company’s ability to convert revenue into earnings. It represents the amount of profit on each dollar of revenue.

16. Gross Margin


Gross Margin measures the business’s ability to convert revenue into gross profit. Gross Margin = Gross Profit ÷ Revenue.

17. Operating Leverage


Operating Leverage magnifies revenue growth into a greater operating earnings growth.

18. EBITDA Margin


EBITDA Margin measures the business's ability to convert revenue into EBITDA. EBITDA Margin = EBITDA ÷ Revenue.

19. Financial Leverage


Financial Leverage magnifies operating earnings growth into a greater net income growth.

20. EPS Growth


In this video, we'll dissect the drivers of EPS growth.

21. How Earnings Drive Valuation


Earnings and valuation are inextricably intertwined.

22. Forecasting Earnings


In this video, we'll build the earnings forecast together for our case study.

23. Bridge to Non-GAAP Earnings


Now, we're going to bridge from GAAP earnings to non-GAAP earnings through adjustments for our case study.

24. Evaluating Case Study Gross Margin


In this video, we'll analyze our case study Gross Margin to derive insights into the business's pricing power.

25. Evaluating Case Study Adjusted EBITDA Margin


In this video, we'll evaluate the Adjusted EBITDA Margin for our case study.

26. Basis Points


Basis Points is a unit measure used to reference changes in percentages.

27. Sanity Check


A solid investment analysis requires us to take a step back and sanity check our numbers.

28. Future Stock Price


In this video, we'll learn how to use forecasted earnings to estimate the future stock price.

29. Future Dividends


In this video, we'll incorporate future dividends into our analysis to calculate case study TSR.

30. Connecting Dots


It's time to connect the dots between what we've learned in this course and our investing strategy so we see the whole picture.