Mergers & Acquisitions

Resources: Glossary

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Capitalization of Earnings

Definition

An earnings-based method of valuing a company by multiplying its earnings by an expected rate of return.

Example

$200,000 annual earnings x 20.0% capitalization rate = $1,000,000 valuation.

See Also

Capitalization rate.

Tips

A capitalization rate is the inverse of a multiple. A 20% capitalization rate equals a 5.0 multiple.

Related Resources

Business Valuation & Return on Investment (ROI)

Business Valuation Methods in a Nutshell