Earning Power Ratio is a measure of the business performance which is not affected by the interest charges and the tax burden. It abstracts away the effect of capital structure and tax factor and focuses on operating performance.
The numerator represents a measure of pre-tax earnings belonging to all sources of finance and the denominator represents the total financing. Tesco’s EPR has been 0.07% in 2005, 0.11% in 2006, 0.11% in 2007, 0.10% in 2008 and 0.07% in 2009. This is good because the pre-tax earnings are more than the total financing so the earning power ratio of the company is good. This is a positive indication for the investors.
Valuation ratios indicate how the equity stock of the company is assessed in the capital market. Since the market value of equity reflects the combined influence of risk and return, valuation ratios are the most comprehensive measures of a firm’s performance.
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