Friday, February 28, 2014

How To Read A Stock Profile Part 2 (Profitability)

     In this post we will continue learning how to read a stock profile, analyzing the Profitability.  Once again the stock is Yandex (YNDX) and the profile is from MarketWatch.

Gross Margin - Gross margin indicates how profitable a company is.  This value is the total revenue minus the costs of goods sold divided by the total revenue ((Revenue - Cost of Goods Sold) / Revenue).  Gross Margin is the measure of the total profit received from revenue.  YNDX retains $.6475 for every dollar of revenue generated.  Typically the higher the gross margin the better.  You will often see tech companies with a higher gross margin then compared to manufacturing companies.
Operating Margin - Operating margin indicates a companies operating efficiency.  This value is the operating income divided by the net sales (Operating Income / Net Sales).  Operating margin lets the investor know what proportion of the company's revenue is left over after paying costs (wages, materials, work area).  Typically the higher the operating margin the better.
Pretax Margin - Pretax margin determines the companies profit before tax and in dictates the company's profitability.  This value is the earnings before tax divided by the total sales (Earnings / Total Sales).  The higher the pretax margin the more profitable the company.
Net Margin - Net margin indicates a how effective a company is at controlling costs.  This value is the net profit divided by revenue (Net Profit / Revenue).  This value is important because you can determine how effective a company is at controlling internal costs compared to its profit.  A higher net margin is better.
Return On Assets - Return on assets tells you how profitable a company is based on its assets.  This value is the net income divided by the total assets (Net Income / Assets).   Return on assets may also be referred to as return on investment. 
Return On Equity - Return on equity tells you the rate of return.  This value is calculated by the net income divided by the shareholder's equity (Net Income / Shareholder's Equity).  As with other returns bigger is better.  This value is commonly used as the main measure of a stock's success.
Profitability Summary

     It is important to understand the profitability of a stock when comparing similar companies.  Remember that with profits bigger is better, however ensure you look at the valuation (see part 1) of a company also to see how their stock value is corresponds with their profit.


1 comment:

  1. Wow, this is very easy to understand and very helpful! Thanks for the info!