Skip to main content

Quarterly results: 5 faces of profit

It's that time of the year when quarterly reports flood mailboxes and dailies, and the words 'earnings' and 'profit' jump out from all over. But which profit should you consider to evaluate a company? What is the utility of profitability measures? Here's a guide to understanding profits.

1) Gross Profit

What is it? It is the amount earned from sale of products after deducting production costs.

What it does: Signals efficiency with which a company is making money. Indicates how much mark-up a company can generate on its sales.

Other clues: A company with rising gross profit means it can command premium prices. This also implies cost efficiency, making the company highly competitive.

Black spots: Works as a primary indicator. Gross profit is similar to an incomplete story. To know more about a company, you have to read other signs.

2) Ebitda

What is it? It means earnings (or profit) before interest, taxes, depreciation and amortisation. It is calculated by subtracting operating, general, administrative and marketing expenses from gross profits.

What it does : Measures profitability. Say, you are having trouble deciding between companies, it is the best tool to compare them because it weeds out the effects of financing and accounting decisions.

Other clues: You can also compare sectors.

Black spots: Ebitda is not a good measure of cash flows. Companies may use it to dress up earnings.

3) Ebit, or operating profit

What is it? Ebit is earnings before interest and taxes. It is calculated by deducting depreciation and amortisation charges from Ebitda.

What it does: Measures a company's earning capacity. An effective comparison tool. Examines performance of companies by negating the effects of financing and taxes. It is useful for shareholders and creditors.

Black spots: Suffers from similar problems as Ebitda—it ignores unavoidable cash outflows due to interest and taxes.

4) EBT

What is it? EBT is earnings (or profit) before taxes and is calculated by deducting interest expenses from Ebit.

What it does: Compares companies in different tax jurisdictions. It is useful for comparing companies within a sector. EBT also shows how well a company is using its borrowings to enhance its return on equity.

Black spots: Again, doesn't give a wholesome picture. Discounting the tax effect is unwise. Say, investors have to choose between two Indian companies. Company A operates in India and Company B has most of its operations in the US. A is posting record profits and B's earnings per share are marginally lower.

Investors would be tempted to pick Company A, but what if corporate tax in India is about to be raised? Then, Company A's profit could fall below Company B's.

5) EAT, or net profit

What is it? Earnings after tax, or net profit, is the most common way to calculate a company's profit. EAT is the company's profit after deducting manufacturing and operating expenses, depreciation, interest and tax.

What it does: Tells the story of a company's performance over a period. Handy tool for equity shareholders as it is the money left after a company makes all payments.

Other clues: EAT helps shareholders analyse the earnings of a company on a per-share basis. Equity dividends are also based on EAT.

 

 

Popular posts from this blog

Mutual Fund Review: Religare Tax Plan

Tax Plan is one of the better performing schemes from Religare Asset Management. Existing investors can redeem their investment after three years. But given the scheme's performance, they can continue to stay invested   Given the mandated lock-in period of three years, tax saving schemes give the fund manager the leeway to invest in ideas that may take time to nurture. Religare Tax Plan's investment ideas revolve around 'High Growth', which the fund manager has aimed to achieve by digging out promising stories/businesses in the mid-cap segment. Within the space, consumer staples has been the centre of attention for the last couple of years and can be seen as one of the key reasons for the scheme's outperformance as compared to the broader market. It has, however, tweaked its focus and reduced exposure in midcaps as they were commanding a high premium. The strategy seems to have worked as it returned a 22% gain last year. Religare Tax Plan has outperformed BSE 100...

Mutual Fund Review: L&T MIP

        This fund won't deliver chart-topping returns. However, over the long run it will not disappoint and end up beating the category average The fund has seen numerous changes at the helm. When Katare took over in October 2007, he made dramatic alterations to the portfolio. On the equity side, he increased the number of stocks to 11 (November) from 2 (September). On the debt side, he added Certificates of Deposit (CDs), while earlier Treasury Bills (T-Bills) and cash accounted for 88 per cent (September 2007) of the portfolio. In November 2007 he exited T-Bills for good. The results impressed. In the last quarter of 2007, it delivered 12.83 per cent (category average: 6.12%). In 2008, the first quarter performance was nothing short of impressive, a return of 9.93 per cent (category average: -3.97%). While other players increased their portfolio maturity, Katare maintained a low maturity profile. While the average maturity of the category was 2.81 years that quarter, th...

Mutual Funds: Past Performance is not just everything

Many a times your agent / distributor / relationship manager tries to push you some mutual fund schemes by enticing you with a typical sales pitch…"Sir, this scheme has generated 20% returns in the past one year." And this sales pitch often gets louder when the market conditions have been favourable. Some of the agents / distributors / relationship managers have another unique way of luring you. They say, "Sir / madam this scheme has been awarded the best scheme award in the past by a leading business channel"... And hearing all these sales talks you investors very often get attracted and sign a cheque in favour of the respective scheme.   But please ask yourself do you hear these sales talks when the capital markets turn turbulent? Why is it so that your agent / distributor / relationship manager avoids talking to you during turbulent times of the capital markets and doesn't boast about returns generated by the respective funds or awards being conferred on t...

Reconfigure investments to reap benefits in DTC

    Investing for tax benefits under the new Direct Taxes Code ( DTC ) will be different in several ways from what taxpayers are familiar with right now. This will require some reconfiguration in the nature of investments for the investor and they need to be ready to tackle the changes that will come about once the new DTC is implemented from financial year 2012-13.One area of interest for most taxpayers is the manner in which they can extract the maximum tax benefit. Here is a look at the situation and also how it changes from the existing position. Basic deduction: At present, there is a deduction of Rs 1 lakh that is available for an individual when they make investments under specified areas such as provident fund, public provident fund, national savings certificates, equity linked savings scheme and insurance premium, among others. This benefit is available under Section 80C of the Income Tax Act. This has been replaced by a new Section 68 under the DTC where there is a deduct...

JP Morgan ASEAN Offshore Fund

  JP Morgan ASEAN Offshore Fund - Invest Online JP Morgan ASEAN Offshore Equity Fund is an international equity mutual fund scheme that invests primarily in companies of countries which are part of the Association of South East Asian Nations (ASEAN). Most international funds , apart from those focused on the US market, have been struggling for sometime. This is because of the uncertainties in the global market. International funds are meant for investors who want to diversify their investments across geographies. If you haven't made your investment for this diversification, you should sell your investments in this scheme.   Best Tax Saver Mutual Funds or ELSS Mutual Funds for 2015 1. BNP Paribas Long Term Equity Fund 2. Axis Tax Saver Fund 3. IDFC Tax Advantage (ELSS) Fund 4. ICICI Prudential Long Term Equity Fund 5. Religare Tax Plan 6. Franklin India TaxShield 7. DSP BlackRock Tax Saver Fund 8. Birla Sun Life Tax Relief 96 9. Reliance Tax Saver (ELSS) Fund 10. HDFC TaxSaver...
Related Posts Plugin for WordPress, Blogger...
Invest in Tax Saving Mutual Funds Download Any Applications
Transact Mutual Funds Online Invest Online
Buy Gold Mutual Funds Invest Now