Basic earnings power ratio
Method of calculation
The ratio complements the assessment of assets profitability, calculated at the level of profit on operating activities.
- The greater the ratio's value, the greater the assets profitability of the company.
- The ratio can be applied to make management decisions: ratio's value indicates the maximum allowed value of liabilities' interest rate, which allows for positive financial leverage effect. Liabilities with higher interest rate lead to negative financial leverage effect ("financial club").
- When assessing the changes in ratio's value over time (over few periods):
- the increase of ratio's value is assessed positively if it results from the increased profit on operating activities,
- the decrease of ratio's value is assessed negatively, since it indicates worsened operating profitability of the company's capital.