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.
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.
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).