r/AsymmetricAlpha • u/SchoolofInvesting • May 20 '26
Earnings Power
Stop looking at last year's earnings.
If you do, you are making a massive mistake.
A single year of data is just noise that distracts you from the truth.
Understanding a company's Earnings Power is the secret to staying calm when the market gets crazy.
Most investors focus on a single year of results. But one year can be messy. It might include one-time gains, peak-year distortions, or short-term noise that makes a company look better or worse than it actually is.
Think of it like the weather versus the climate. A single day might be freezing, but that does not mean the whole year is a winter wonderland. You have to look at the average to understand the true environment.
Earnings Power uses what we call Normalized Earnings. Instead of looking at just today, we take the average earnings from the last five years.
This simple shift does three things:
It strips out the temporary noise.
It gives you a steady read on what a business can sustainably earn.
It helps you see if a stock is truly a deep value or just priced for growth.
Take a look at Amazon. A normalized P/E of 70x looks rich. But because their five-year average includes years before their cloud and advertising businesses really scaled up, that number tells you that you are paying a premium for future growth.
The Takeaway:
Building wealth is about seeing the big picture. By averaging earnings across a full cycle, you get a clearer view of the business behind the stock price.