Fınancıal Statement Analysıs (ENG) — Ünite 8 Soru-Cevap

The companies may have different financial objectives. Among those objectives making profit settles on the top of the list.

This comparison shows that company A is a better alternative. Company A provides more gross profit and more net profit than the overall industry. On the other side company B has a poor performance compared to industry averages.

Simply, profit can be defined as a surplus of income over expenses. When an accounting income is greater than expenses a profit is produced, when expenses are greater it results in a loss.

Revenues are income generated from ordinary business activities like sale of goods or services.

Revenue is the income that an entity earned during its ordinary course of business. Cost of sales on the other hand measures the total directly attributable cost of a product or service sold to the customer. Their difference makes the gross profit.

An important type of expense in businesses is operating expenses. Operating expenses consist of marketing expenses, general administrative expenses, and research and development expenses. Operating profit is computed by deducting

operating expenses from gross profit.

Net profit/loss represents the final outcome of the company’s performance which was the net of all revenues and expenses of the company for the given period.

Profit is an absolute amount that shows the net difference between its revenue and expenses during a period. Profitability on the other hand is a relative one. It is a measure that determines the company’s profit in relation to a base. That base can be total assets, net sales or another related item.

Gross profit represents the income that company makes from its main activity.

Margin ratios represent the relationship of income (profit) elements with sales. Income statement is the only source needed to calculate these ratios.

A low gross profit margin may cause financial problems for the company. Thus, if this ratio is lower than industry averages, it will be an indicator of a financial distress.

Higher operating profit margin is preferable. Higher margin shows that all operating expenses are covered and it is a sign of a higher net profit margin.

Return on total assets shows how much income generated by one monetary unit of asset.

Another important ratio is return on equity. This ratio shows the net income earned for one unit of investment made by the shareholders.

DuPont analysis was initially developed by DuPont Corporation’s management in the 1920s.

Calculating and understanding the profitability ratios are easy. However, to interpret the profitability ratios correctly needs some attention. Standalone profitability ratios may give some insights about the company. Nevertheless, for a more correct picture we must understand the company operations and management policy that may have different effects on operations other than the industry.

On the other hand, we see that the ratio of asset turnover is decreasing. That is a bad sign. It indicates that the business does not generate enough income, or its potential to generate income decreases. The trend analysis in Chapter 4 showed that the revenues are growing at a lower rate than the assets. To sum up the business should find out the reasons that decreases the asset turnover.

While interpreting the profitability measures, the details of the profit/loss must be understood. The analyst should understand the main source of income and should be able to compare the similarities and differences of the company’s operations with the competitors and industry.

While analysing the company, it should be questioned whether there is a healthy operating structure and a management approach. Profitability is an important indicator in terms of operating performance, however; profitability not supported by sustainability, may lead to negative developments in the future.

Yes. There are many cases related to the fact that profit is manipulated for various reasons in the accounting literature. Manipulating the profit amount will directly cause profitability rates to produce incorrect results. In most cases, it is not possible to detect this manipulation.