Enter the total earnings before interest and taxes and the total assets of a business to determine the basic earning power.
Basic Earning Power Formula
The following formula is used to calculate a basic earning power.
BeP = EBIT / A
- Where BeP is the basic earning power
- EBIT is the earning before taxes and interest ($)
- A is the total assets ($)
A basic earning power, also known as BEP for short, is a ratio of the EBIT to total assets of a given business. It’s a measure of a company’s leverage of earnings to assets. The higher the ratio the higher the leverage and more earnings per asset value.
How to calculate basic earning power?
- First, determine the EBIT.
Calculate the total earnings before interest and tax of the particular business or segment.
- Next, determine the total assets value.
Calculate the total value of all assets in the business.
- Finally, calculate the basic earning power.
Using the formula above, the EBIT, and asset value, determine the basic earning power. Use the ratio to analyze the financial leverage the business has.
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