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Profitability Basics

Analyzing Firms

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The primary point of any firm is to utilize capital invested by shareholders to generate a profit. This profit serves as the shareholders return. The best firms will generate higher average returns for their shareholders over long periods of time. It’s very important that you decipher how much money the firm sustainably earns its shareholders as a return on their investment. The absolute level earned isn’t as important as the pattern, consistency, and growth of returns.

When utilizing profitability ratios, you can gather an approximate idea of how the firm compares to competitors or an industry average. You should also take the time to look at this in relation to revenue growth. If profitability and revenue growth are high you have found a potential investment, assuming all other sectors of the firm are in line.

The ratios in this section measure Profitability in a company or firm. These are useful to determine which firms have the highest profitability overall. They do have a shortcoming. They do not measure which firms should be invested in or which firms are best on their own. They are worthless in a vacuum and should be measured against other firms or the same firm over previous years.

Margin Ratios

Margin Ratios measure the amount of sales revenue that is kept as profit by the company. This occurs by comparing Sales or Revenue (the top line of the Income Statement) against other expense categories such as after deductions like Costs of Goods Sold, Sales and Administrative Expenses, or Taxes and Interests. By using Margin Ratios, you can determine if a certain expense is increasing or decreasing over time and where firms are losing their profits. It is wisest to express margin ratios as percentages. This helps you determine where the firm loses the highest percentage of sales revenue to expenses.

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International Economic Analysis:

  • Major Currency Economic Summaries
  • Performance of Major Imports and Exports
  • Mandates of Central Banks versus Expectations
  • Performance Indexes of Major Economies
  • Economically Correlated Currency Projections
  • Large Funds Currency Sentiment Readings
  • List of Technical Indicators to Look For
  • Occasional: Foregin Exchange Technicals Markups

American Markets Analysis:

  • Summaries of American Economic Structure
  • Performance of Major
  • Imports/Exports
  • Federal Reserve Mandate versus Expectations
  • Performance Indexes of U.S Economy
  • Economically Correlated U.S Dollar Projections
  • Large Trading Fund Index Sentiment Readings
  • Market Wide Earnings Versus Valuations
  • Fundamental Ranking of U.S Business Sectors
  • Best and Worst Future Consensus Estimates
  • Occasional: Firm Fundamental Strength Report
  • List of Technicals to Look for While Trading

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