Looking at a company's profitability is a very important step in understanding a company. Profitability is essentially why the company exists and is a key component while deciding to invest or to stay invested in a company. There are many metrics involved in calculating profitability, but for this test, I will look at Boeing's (NYSE:BA) Earnings and Earnings Growth, Profit Margins, Profitability Ratios and Cash Flows.
Through the above-mentioned four main metrics, we will understand more about the company's profitability and if this summary is compared with other companies in the same sector, you will be able see which has been the most profitable.
Earnings and Earnings Growth
1. Earnings = sales x profit margin
• 2010 - $64.306 billion x 5.14% = $3.307 billion
• 2011 - $68.735 billion x 5.84% = $4.018 billion
Boeing's earnings increased from $3.307 billion in 2010 to $4.018 billion in 2011. This was an increase of 21.5%.
2. Earnings per share = net income / shares outstanding
• 2010 - $3.307 billion / 735.26 million = $4.50
• 2011 - $4.018 billion / 744.70 million = $5.39
Boeing's earnings per share increased from $4.50 in 2010 to $5.39 in 2011. An increase of 19.8%
3. Five-year historical look at earnings growth
• 2007 - $4.074 billion, 83.92% increase over 2006
• 2008 - $2.672 billion, 52.47% decrease
• 2009 - $1.312 billion, 74.9% decrease
• 2010 - $3.307 billion, 199% increase
• 2011 - $4.018 billion, 84% increase
In analyzing the earnings growth of Boeing over the past five years, it is clear the company has posted three very strong years in earnings growth and two very weak years. Compared to 2007 the company is still down 1.4%.
4. Gross Profit = Total sales - cost of sales
When analyzing a company, gross profit is very important because it indicates how efficiently management uses labor and supplies in the production process. More specifically, it can be used to calculate gross profit margin.
• 2010 - $64.306 billion - $51.843 billion = $12.463 billion
• 2011 - $68.735 billion - $55.867 billion = $12.868 billion
5. Gross Profit Margin = Gross Income / Sales
The gross profit margin is a measurement of a company's manufacturing and distribution efficiency during the production process. The gross profit tells an investor the percentage of revenue/sales left after subtracting the cost of goods sold. A company that boasts a higher gross profit margin than its competitors and industry is more efficient. Investors tend to pay more for businesses that have higher efficiency ratings than their competitors, as these businesses should be able to make a decent profit as long as overhead costs are controlled (overhead refers to rent, utilities, etc.)
• 2010 - $12.463 billion / $64.306 billion = 19.38%
• 2011 - $12.868 billion / $68.735 billion = 18.72%
As the gross profit margin decreased, it implies that management was slightly less efficient in its manufacturing and distribution in the production process than the year previous. The gross margin fell from 19.38% to 18.72%. As the gross margin decreased, Boeing does not pass this metric.
6. Operating income = Total sales - operating expenses
The amount of profit realized from a businesses operations after taking out operating expenses - such as cost of goods sold (COGS) or wages - and depreciation. Operating income takes the gross income (revenue minus COGS) and subtracts other operating expenses and then removes depreciation. These operating expenses are costs that are incurred from operating activities and include things such as office supplies and heat and power.
• 2010 - $4.971 billion
• 2011 - $5.844 billion
7. Operating Margin = operating income / total sales
Operating margin is a measure of what proportion of a company's revenue is left over after paying for variable costs of production such as wages, raw materials, etc. A healthy operating margin is required for a company to be able to pay for its fixed costs, such as interest on debt.
If a company's margin is increasing, it is earning more per dollar of sales. The higher the margin, the better.
• 2010 - $4.971 billion / $64.306 billion = 7.73%
• 2011 - $5.844 billion / $68.735 billion = 8.5%
As Boeing's operating Margin has increased, it leaves more cash for the company to pay for its fixed costs. As the operating margin increased, Boeing passes this metric.
8. Net Profit Margin = Net income / total sales
A ratio of profitability calculated as net income divided by revenues, or net profits divided by sales. It measures how much out of every dollar of sales a company actually keeps in earnings.
Profit margin is very useful when comparing companies in similar industries. A higher profit margin indicates a more profitable company that has better control over its costs compared to its competitors. Profit margin is displayed as a percentage; a 20% profit margin, for example, means the company has a net income of $0.20 for each dollar of sales.
• 2010 - $3.307 billion / $64.306 billion = 5.14%
• 2011 - $4.018 billion / $68.735 billion = 5.84%
As Boeing's net profit increased, it implies that the company is more profitable than it was a year ago. To pass, the net income must increase. Boeing passes.
9. SG&A % Sales = SG&A / total sales
Reported on the income statement, it is the sum of all direct and indirect selling expenses and all general and administrative expenses of a company.
High SG&A expenses can be a serious problem for almost any business. Examining this figure as a percentage of sales or net income compared to other companies in the same industry can give some idea of whether management is spending efficiently or wasting valuable cash flow.
• 2010 - $3.644 billion / $64.306 billion = 5.67%
• 2011 - $3.408 billion / $68.735 billion = 4.96%
As the SG&A % Sales decreased, it implies that management is spending more efficiently. To pass, the SG&A % Sales must decrease. Boeing passes.
10. ROA - Return on Assets = Net income / total assets
ROA is an indicator of how profitable a company is relative to its total assets. ROA gives an idea as to how efficient management is at using its assets to generate earnings. Calculated by dividing a company's net income by its total assets, ROA is displayed as a percentage. Sometimes this is referred to as "return on investment."
• 2010 - $3.307 billion / $79.986 billion = 4.31%
• 2011 - $4.018 billion / $80.205 billion = 5.01%
As the ROA increased from 4.31% in 2010 to 5.01% in 2011, it implies that management is using its assets to generate earnings. Boeing passes.
11. ROE - Return on Equity = Net income / shareholder's equity
The amount of net income returned as a percentage of shareholders equity. Return on equity measures a corporation's profitability by revealing how much profit a company generates with the money shareholders have invested.
• 2010 - $3.307 billion / $3.515 billion = 94.08%
• 2011 - $4.018 billion / $5.027 billion = 79.92%
As the ROE decreased from 94.08% in 2010 to 79.92% in 2011, it reveals that the company is generating less profits from the money shareholders have invested. Boeing does not pass.
12. Free Cash Flow = operating cash flow - capital expenditure
A measure of financial performance calculated as operating cash flow minus capital expenditures. Free cash flow (FCF) represents the cash that a company is able to generate after laying out the money required to maintain or expand its asset base. Free cash flow is important because it allows a company to pursue opportunities that enhance shareholder value. Without cash, it's tough to develop new products, make acquisitions, pay dividends and reduce debt.
It is important to note that negative free cash flow is not bad in itself. If free cash flow is negative, it could be a sign that a company is making large investments. If these investments earn a high return, the strategy has the potential to pay off in the long run.
• 2010 - $2.952 billion - $1.125 billion = $1.872 billion
• 2011 - $4.023 billion - $1.713 billion = $2.31 billion
As the final number in free cash flow is growing and positive, there is no need for concern. If the free cash flow is negative, it will require more research to find out if the company is making large investments. As Boeing's free cash flow is positive, the company passes.
13. Cash flow margin = Cash flow from operating activities / total sales
The higher the percentage, the more cash available from sales.
If a company is generating a negative cash flow, which would show up as a negative number in the numerator in the cash flow margin equation, then even as it is generating sales revenue, it is losing money. The company will have to borrow money or raise money through investors in order to keep on operating.
• 2010 - $2.952 billion / $64.306 billion = 4.59%
• 2011 - $4.023 billion / $68.735 billion = 5.85%
As the company's cash flow margin is positive, it does not have to borrow money or raise money to keep operating. To pass, the cash flow margin must be positive. Boeing passes.
In analyzing Boeing's profitability, it is clear that the company is profitable. The company's earnings and earnings growth has been very volatile over the past five years. Even though the economic recession had a great impact on Boeing's earnings in 2008 and 2009, the company has been recovering nicely.
Boeing passed all aspects of the profit margins segment, expect for the gross margin. In 2010 through to 2011, the gross margin fell slightly, indicating that it was less efficient in manufacturing and distribution. The company had healthy increases in Operating Margin, net profit margin and a decrease in the SG&A % Sales - which are all positive indicators of profitability. Boeing received 3 passes out of 4 on the profit margins segment of the analysis.
Boeing passed the ROA segment of the analysis but not the ROE segment of the analysis. As the ROA increased it indicates that Boeing's management is more efficient at using its assets to generate earnings than the previous year. The company did not pass the ROE aspect of the analysis indicating that the company was less profitable with money shareholders have invested. As the company had a healthy increase in its ROA segment and a decrease in the ROE segment, Boeing receives 1 pass out of 2.
Boeing passed both aspects of the cash flow summary. As the free cash margin increased this indicates that the company has money to, develop new products, make acquisitions, pay dividends and reduce debt. As the company's Free Cash Flow displayed positive results, the company receives 2 pass out of 2.
In analyzing Boeing's profitability, it is clear that the company has been profitable over the past few years. Most aspects of profitability are positive, so there are no red flags raised with these aspects of Boeing's profitability.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.