## Basic Earning Power Ratio

It is a metric that reflects the relation of earnings of the company to its assets. And it shows the company’s efficiency in generating earnings from its assets. Hence, the basic Earning Power Ratio Calculator helps in checking this efficiency.

Moreover, the higher the Earning Power Ratio, the better it is.

## Formula

The formula for calculating the basic earning power ratio is:

**Basic Earning Power Ratio** = EBIT / Total Assets

Or,

**Basic Earning Power Ratio** = Operating Profit Margin * Total Assets Turnover Ratio

We need to understand that the second formula will eventually give the same result as the first one. How? And let us have a look at how it will get converted into the first one.

**Operating Profit Margin** = EBIT / Turnover

**Total Assets Turnover Ratio** = Turnover / Total Assets

Now putting both the formulas in the second formula of the basic earning power ratio, we will get the first formula.

Basic Earning Power Ratio = (EBIT / Turnover) * (Turnover / Total Assets)

That is, EBIT / Total Assets

## About the Calculator

Basic Earning Power Ratio Calculator effortlessly provides the result by simply providing it with the following details:

- EBIT (Earnings Before Interest and Tax)
- Total Assets

## Calculator

## How to Calculate using Calculator?

The user has to only type the following figures in the calculator and will get the result with a simple click on the calculate button.

### EBIT

It is the earnings of the company before paying off interest and taxes. Both operating and non-operating incomes are a part of this. EBIT can be calculated with the help of the following formula:

**EBIT** = Net Income + Interest + Taxes

To know more about EBIT, refer to the article: *EBIT*

### Total Assets

We can easily obtain the value of total assets from the balance sheet.

## Example

Suppose, Mr. X, having a surplus of $65,000, wishes to make an investment. He is interested to invest in a project of his known one. The estimated net income of the project is $275,000, interest is $35,000 and tax is equal to $90,000. The total assets stand at $3,500,000.

EBIT = 275,000 + 35,000 + 90,000 = 400,000

Basic Earning Power Ratio = (400,000 / 3,500,000) * 100 = 11.43%

## Interpretation

As said above, the higher the basic earning power ratio, the better it is. It simply shows the company’s efficiency in using its assets. The basic earning power ratio in the above example is relatively good. But this cannot be stated true without comparison with a similar project or similar industry.

## Cautions

Basic earning power shows the efficiency in the performance of assets of the company. But what next? It does not provide a clear picture that helps in arriving at a decision. It needs further evaluation using other ratios and comparison tools. The basic earning power ratio is an indicative factor and not conclusive. And as usual, this should not be used in isolation.