What is the capitalization of earnings?
earnings capitalization is a method used by investors or potential investors to reflect the estimated value of investment by calculating the current cash flow in conjunction with any expected risks. Cash flow of the company concerns everyday earnings from this business, while capitalization is a return on investment in terms of profit. Method of capitalization of earnings allows investors to measure estimated income from a number of potential risks to determine the best solution.
Simple illustration of earnings can be shown using an example of an investor who has some money to invest. Let's say that the investor has a choice of investment in one of the three housing complexes called A, B and C. The apartment A is in a good neighborhood and each unit is rented for $ 1,500 (USD) per month. Apartment B is a slightly less safe neighborhood, but each unit goes for $ 1,500 (USD.month. Apartment C has 150 units rentals, while apartments A and B have 70 units. Every complex building costs the same amount.
The potential investor will use the capitalization of earnings in this situation by considering capitalization compared to the risk. The C apartment may seem like a good trade, but the fact that the neighborhood is dangerous is the risk that affects the investment by maintaining potential tenants away and some units remain empty. Apartment B is also not a good investment if the apartment and available at the same price and are in a better area.
apartment and will bring the best revenues over time, because it is in good neighborhood and demand for rental units in this part of the city is high. Such an investment can even appreciate the future as the strength of demand and limited supplier work to increase the price of lease apartments in this neighborhood. The capitalization of the earnings' earnings for an apartment and is therefore the best of DOutstanding options.
earnings capitalization can also be used for other investment options except only real estate. The only disadvantage of this method of potential income valuation for investment is that the investment must have a projectable cash flow. For example, the capitalization of earnings can be used for rental units, as the expected income from the units may be set up to the set time limit. This income can then be compared to risks to see if the investment is worth the required price.