When you look at a company’s financial report, the words “earnings” and “profit” jump out at you. Which profit should you look at when judging a business? Why do we need so many ways to measure profit? How do analysts figure out the ratios they keep talking about?
Here is a quick breakdown of the important terms of an earnings report.
Before getting to understand a company’s earnings report, we would like to inform you that at Zebu, an online stock broker company we offer lowest brokerage for intraday trading and the best online trading platforms.
1. Gross profit
What it is: Sales minus the cost of making those sales. To figure out the cost of goods sold, you add the purchases made during the period to the net stock.
The meaning: Not the company’s total income because it doesn’t count “other income” like rent.
2. EBITDA
What it is: Earnings before interest, taxes, depreciation, and amortisation. To figure out net profit, take gross profit and subtract operating, general, administrative, and selling costs.
The meaning: Not a true picture of how profitable a company is because it includes taxes and interest payments, which can be very high for some companies.
3. EBIT
What it is: Income before interest and taxes are taken out. Operating profit is another name for it. Depreciation and amortisation costs are subtracted from EBITDA to get this number.
The meaning: This shows how much money the company makes from its main business.
4. EBT
What it means: Income before taxes. Interest costs are subtracted from EBIT to get this number.
What it means is that tax deductions are different for each company. EBT makes it easy to compare how companies use loans to increase their return per share because it includes taxes but not interest.
5. NET PROFIT
How it works: Calculated by taking the tax out of the EBT. Also called net profit (PAT).
The meaning: Since all payments have been made, it shows how much the company made in the end. PAT is used to figure out the dividends.
6. EPS
This is the earnings per share. This number is found by dividing PAT by the number of shares in circulation.
The meaning: It shows how much each share of a company is making. When calculating EPS, dividends on preference shares are not taken into account.
7. P/E
How it works: Divide the current share price on the market by the earnings per share to get this number.
The meaning: This shows how much an investor is willing to pay for one rupee of a company’s earnings. Analysts use it to figure out if a company is undervalued or overvalued.
8. Operating ratio
It is figured out by dividing operating costs by net sales (revenue). It shows how much of the income goes toward operating costs. The lower the ratio is, the better the company is. This shows that the company has enough cash on hand to grow and pay interest.
9. Net profit ratio
It’s PAT divided by net sales. This shows how much money a company makes on every Rs 100 sale. If the ratio is high, it means that the company is making a lot of money.
10. Debt-equity ratio
It shows how financially stable a company is and is found by dividing debt by equity. If the ratio is less than one, the company is using more of its own money and less debt. If the ratio is more than one, the company is using more debt than its own money. Since interest costs are fixed, a company with earnings that change a lot can take a risk by having a lot of debt. Companies that make a lot of money can increase the returns for equity shareholders by taking on a lot of debt.
These are the key terms that you should keep in mind while analysing a company’s performance.
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