Profitability is the ability to generate profit and

earning persistence is the ability to have income year to year. Profitability

is important when it comes to a company’s evaluation. When thinking about

investing, you do not have a company that isn’t capable of generating profit. Profitability

ratios measure how much company revenue is eaten up by expenses, how much a

company earns relative to sales generated, and the amount earned relative to

the value of the firm’s assets and equity. Stockholders have a special interest

in the profitability ratios because profit ultimately leads to cash flow, a

primary source of value for a firm. There are five profitability ratios that

help determine a company’s ability to generate profit: gross profit margin,

operating profit margin, net profit margin, return on assets and return on

equity. The following are calculations for Textron and their profitability. The

gross profit margin is gross profit/sales: $2,477/$13,788 which equals 18%. The

operating profit margin is the EBIT/sales: $1050/$13,788 which is 7.6%. The net

profit margin is net income/sales which is 7%. Return of assets is net

income/total assets which is 6.2% and the return of equity is 17%. The

calculation for return of equity is net income/stockholders’ equity.

Earnings

persistence is important as well for evaluating a company. Price to earnings

ratio is a good ratio is to use for earnings persistence. It helps measures the

market’s perception of the future earning power of a company, reflected in the

stock share price. The P/E ratio is market price per share/earning per share.

The equation is $54.57/$3.55 which is 15.4. This means that $54.57 is 15.4

times the level of its 2016 earnings per share and it will take 15 years to

accumulate net profits of $54.57 per share. That is the amount an investor

would pay today to buy this stock.

Bombardier’s

gross profit margin is 12% ($466/$3,835). Their operating profit margin is 3%

($115/$3,835). Bombardier actually had a negative net income of -3%

(-$117/$3,835). Their return on assets is -.05% (-$117/$23,709). Return on

Equity was 3.2% (-$117/-$3,626). Bombardier’s earnings persistence is not great

as their equity value is negative especially due to their high debt. Their P/E

ratio is – 61.4 ($3.07/ – 0.05).