Defining a Baseline EP
One can create a custom definition of EP from scratch by imputing a "P&L" from changes in the market value of net assets, to the extent that can be created. But it is far easier, and more likely to be accepted in the company, if we begin at a familiar starting point, such as Net Earnings or EBITDA, then create a baseline definition of EP by subtracting an easily calculated charge for the net assets.
The net asset charge should be consistent with the earnings measure. For instance, since EBITDA does not count depreciation and amortization, the capital charge would be on assets that have not been depreciated or amortized (e.g., gross fixed assets).
This calculation would yield a "baseline EP" from which we can make adjustments leading to a custom EP that more accurately tracks changes in company value from one period to the next.
