Capitalized Earnings

Capitalized earnings is a methodology in the income valuation method used to determine the value of a company. Capitalized earnings are calculated by determining the net present value of expected future profit of the company. To calculate earnings by this method, the company take future earnings and divides them by an expected capitalization rate. The capitalization rate is the rate of return an investor can expect on its investment. Higher risk companies and companies relying on equipment that depreciates over time have higher capitalization rates. This earnings calculation is a popular way to value companies as it looks at actual financial information about the company and requires founders to quantify their expected performance over several years and requires investors to understand their appetite for risk as expressed through the projected return on investment. However, startup companies often lack rigorous financial data and do not have large data sets for their financial results. For these reasons, assumptions used in generating a figure for capitalized earnings for a startup can have a significant impact of the value of the earnings figures. Investors rely on several methods to determine the value of a company and capitalized earnings may only play a small part in the ultimate decision to invest.