The basic earning power ratio is the relationship between the earning power of a company and its assets. The higher the Earning Power Ratio, the better it is.
The formula for calculating the basic earning power ratio is:
Basic Earning Power Ratio = EBIT / Total Assets
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? Let us have a look.
Operating Profit Margin = EBIT / Turnover
Total Assets Turnover Ratio = Turnover / Total Assets
Now putting both these 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
Basic Earning Power Ratio 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.