Definition:
Basic earning power is a financial ratio that measures a company’s profitability before considering interest expense and taxes. It’s a measure of a company’s operating efficiency and its ability to generate earnings from its assets.
Formula:
Basic Earning Power = (Earnings Before Interest and Taxes (EBIT)) / Total Assets
Why is basic earning power important?
- Operating efficiency: Basic earning power measures a company’s operating efficiency, as it excludes the effects of financing and taxes.
- Asset utilization: It shows how effectively a company is using its assets to generate income.
- Investment analysis: Basic earning power is a useful tool for investors to assess a company’s profitability and compare it to other companies in the same industry.
However, it’s important to note that basic earning power does not take into account the effects of financing and taxes, which can significantly impact a company’s overall profitability.
In essence, basic earning power is a financial ratio that measures a company’s operating efficiency and its ability to generate earnings from its assets.
