Interpreting Financial Results
FIN/571
July 22, 2013
Interpreting Financial Results
Liquidity: Current Ratio Parrino, Kidwell, & Bates (2012) detail the current ratio as current assets divided by liabilities. The current ratio identifies a firm’s potential to pay short-term liabilities; higher liquidity is a good sign for potential creditors (Parrino et al., 2012). At the same time, however, the current ratio should not greatly exceed benchmarks of other competitors (Parrino et al., 2012). This could be indicative of mismanagement of current assets and less cash flow for investors (Parrino et al., 2012). Current assets ($29,307,990) divided by current liabilities ($20,530,890) gives a current ratio for ABC SDN. BHD. of 1.43.
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The previous year ABC SDN. BHD. had a gross profit margin of .108. The increase in the gross profit margin is due to the decrease of $72,386,000 in the cost of goods sold. American Airline Cargo, its close competitors’ gross profit margin (in millions) is calculated
$22,170 – $308
$22,170
to give a gross profit margin of .086. The GPM of ABC SDN. BHD. is higher than that of its competitor, which indicate the company is doing well. The operating profit margin helps investors understand quality of the company in terms of how much a company makes on each dollar of sale. The formula to calculate the operating profit margin is
EBIT
Net Sales
$4,529,000
$121,592,000
which gives an operating profit margin of .037. The previous accounting period the company had OPM of .035. During this same accounting period AMR had a net loss.
The net profit margin helps investors understand how profitable a company is. This explains how much profit a company has per dollar of sales. ABC SDN. BHD. has a net profit margin of
Net Income
Net Sales
$2,707,000
$121,592,000
which gives a net profit margin of 2.22%. The net profit margin for the previous accounting period was 1.92%. This indicates that the company has produced an increase in profit per dollar from one accounting period to the next. The competitors had a net loss for the accounting period ending 2010.
Conclusion
References
Air Canada. (2010). Air
• Net profit margin has been negative and no major patterns over the 9 year period on net profit since the trend of the industry is based mostly on economic factors, and whether or not they secure contracts. Due to high percentage of COGS they are only left with a net profit of $980 or
David Jones’ gross profit margin for the past three years has remained stable with minimal fluctuations. The following calculated figures are for the year 2010, 2011, 2012, and 2013; 39.73%, 39.10%, 37.50% and 37.8% respectively. Such an observation is desirable as it is indicative that the company is financially stable as it is generating enough income to cover its operating expenses and make savings. It suggests that the industry in which the company operates has not experienced drastic economic fluctuations that can affect the company’s cost of goods sold. However,
Net Margin is the ratio of net profits to revenues of a company. It is used as an indicator of a company’s ability to control its costs and how much profit it makes for every dollar of revenue it generates. Net Margin is calculated using the formula: Net Margin = (Net Profit / Revenues ) * 100 Net margins vary from company to company with individual industries having typically expected ranges given similar constraints within the industry. For example, a retail company might be expected to have low net margins while a technology company could generate margins of 15-20% or more. Companies that increase their net margins over time generally see their share price rise over time as well as the company is increasing the rate at which it turns dollars earned into profits.
This measures the relationship between net profits and sales of a firm. The net profit margin is indicative of management’s ability to operate the business with sufficient success not only to recover revenues of the period, the cost of merchandise or services, the expenses of operating the business and the cost of the borrowed funds, but also leave a margin of reasonable
A person can see from the analysis that both companies had a fewer profits in 2005 over 2004. The increase of operation expenses was the cause of low net profits. Both companies need to rethink their operating cost to decrease their expenses which in return can help increase their profit margin.
In terms of industry profitability, it appears that profit margins have a tendency to fall. This is because competition is high and customers tend to buy low-priced high-value items. The average gross margin and net profit margin is 37.1% and 14.3%, respectively (MSN Money, 2010).
During the period 2012 and 2013, the Operating profit margin decreased from 9.2% to 5.7%. This slight decline can be attributed to the decreased revenues and the increase in tax expenses.
Profit Margin – The profit margin is calculated by dividing net income by sales. At first glance, one can immediately see Ford’s strong profits during the five year period with a 2014 being the exception when profits plummeted 56% from the previous year. This was due to higher costs, lower costs and several setbacks. General Motors, on the other hand, while not showing the same glitzy profit margin as Ford, remained extremely steady, although the industry norm for 2014 was 2.85%
Operating profit margin figures in the table above show the return from net sales[13]. However profit margin ratios are high enough for the 3 years, there is a fall from 12.86% to 11.26% during 2011-12. Sales revenue increases with a higher rate than gross profit so there is a poor
Used to determine the competitive strength and cost effectiveness of a company, the operating profit margin shows what percentage of a company’s revenue is left over after covering variable costs. It is the operating profit divided by the net sales. Essentially, the operating profit margin depicts how much a company makes on each dollar of sales.
In 2017, the firm had a higher percentage of cost of sales in term of revenue than 2016, the cost of sales was 30.11% which was higher than 2016 for 0.21%, that means the firm’s gross margin in 2017 (69.89%) will also lower than the gross margin in 2016 for 0.21%. Burberry had a higher net operating expenses in 2017. The net operating expenses was 55.63% which was higher than 2016 for 1.56%, that also lower the operating margin, therefore the operating margin for the firm has decreased from 16.02% to 14.26% (-1.76%).
When looking at profitability ratios, we notice that Apple has a lower gross profit compared to its competitor Cisco Systems Inc. However, company’s net profit margin is higher. This means that maybe Apple is not making as much profit on its cost of sales, but it
a) It’s operating margin of 8%-plus (vs. 2% in 2003). Even strong impact of yen, the estimate profit of 2003 was doubled of 1999’s level.
Now let’s see how much profit a company makes for every $ 1 it generates in revenue. Profit margins vary by industry, but all else being equal, the higher a company’s profit margin compared to its competitors, the better.