Looking at profitability is a very important step in understanding a company. Profitability is essentially why the company exists and a key component of deciding to invest or to remain invested in a company. There are many metrics involved in calculating profitability, but for this article, I will look at Exelon Corporation's (NYSE:EXC) earnings and earnings growth, profit margins, profitability ratios and cash flow.
Through the above-mentioned four main metrics, we will understand more about the company's profitability. And by comparing this summary to 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 - $18.644 billion x 13.75% = $2.563 billion
- 2011 - $18.924 billion x 13.18% = $2.495 billion
Exelon Corp's earnings decreased from $2.563 billion in 2010 to $2.495 billion in 2011 or an decrease of 2.73%.
2. Five-year historical look at earnings growth
- 2007 - $2.736 billion, 71.85% increase over 2006
- 2008 - $2.737 billion, 0.00% decrease
- 2009 - $2.707 billion, 1.11% decrease
- 2010 - $2.563 billion, 5.62% decrease
- 2011 - $2.495 billion, 2.73% decrease
In analyzing Exelon Corp's earnings growth over the past five years, you can see, after a very strong 2007 in which the earnings shot up 71.85% over 2006 the earnings have tailed off and decreased every year since then. According to Morningstar the current TTM has earnings at 1.693 billion. Overall, the 2011 earnings are 9.66% lower than 2007.
3. Gross Profit = Total Sales - Cost of Sales
In 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. Here are Exelon Corp's gross profits for the past two years:
- 2010 - $18.644 billion - $6.435 billion = $12.209 billion
- 2011 - $18.924 billion - $7.128 billion = $11.796 billion
4. 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.).
In analyzing Exelon Corp's gross margin over the past five years, the margin looks to have peaked in 2009, then come off a bit over the past few years. The 2011 gross profit margin of 62.33% is below the 5-year average of 64.40%.
- 2007 - $11.274 billion / $18.916 billion = 59.60%
- 2008 - $12.277 billion / $18.859 billion = 65.09%
- 2009 - $12.037 billion / $17.318 billion = 69.50%
- 2010 - $12.209 billion / $18.644 billion = 65.48%
- 2011 - $11.796 billion / $18.924 billion = 62.33%
The decrease in the gross margin implies that management has been less efficient in its manufacturing and distribution during the production process in 2011 compared to the 5-year average.
5. Operating income = Total Sales - Operating Expenses
The amount of profit realized from the operations of a business 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, 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 - $4.726 billion
- 2011 - $4.480 billion
6. Operating Margin = Operating Income / Total Sales
Operating margin is a measure of the proportion of a company's revenue that 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.
Exelon Corporation's operating margin over the past 5 years peaked in 2008 with a margin of 28.09%. Over the past few years the operating margin has been trending lower going from $5.299 in 2008 to $4.480 billion in 2011. The 2011 operating margin of 23.67% is below the 5-year average of 25.43%.
- 2007 - $4.276 billion / $18.916 billion = 22.61%
- 2008 - $5.299 billion / $18.859 billion = 28.09%
- 2009 - $4.750 billion / $17.318 billion = 27.43%
- 2010 - $4.726 billion / $18.644 billion = 25.35%
- 2011 - $4.480 billion / $18.924 billion = 23.67%
As the 2011 operating margin is below the 5-year average, this implies that there has been less of the percentage of total sales left over after paying for variable costs of production such as wages and raw materials.
7. Net Profit Margin = Net Income / Total Sales
A ratio of profitability calculated as net income divided by revenue, 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.
In looking at the 5-year summary of Exelon's net profit margin this reveals that the margin peaked in 2009 then fallen off since then. In 2011 the profit margin was lower than in 2007.
- 2007 - $2.736 billion / $18.916 billion = 14.46%
- 2008 - $2.737 billion / $18.859 billion = 14.51%
- 2009 - $2.707 billion / $17.318 billion = 15.63%
- 2010 - $2.563 billion / $18.644 billion = 13.75%
- 2011 - $2.495 billion / $18.924 billion = 13.18%
Like the gross profit margin the net profit margin peaked in 2009 then has come off since then. This implies that there has been an decrease in the percentage of earnings that the company is able to keep since 2009.
9. 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."
Exelon Corporation's ROA has been declining over the past five years. The company's 2011 result of 4.53% is below 5-year average of 5.32%.
- 2007 - $2.736 billion / $45.894 billion = 5.96%
- 2008 - $2.737 billion / $47.817 billion = 5.72%
- 2009 - $2.707 billion / $49.180 billion = 5.50%
- 2010 - $2.563 billion / $52.240 billion = 4.91%
- 2011 - $2.495 billion / $55.092 billion = 4.53%
As the current ROA of 4.53% is below the 5-year average of 5.32%, this implies that management has been less efficient at using the company's assets to generate earnings compared to its 5-year average.
10. ROE - Return on Equity = Net Income / Shareholders' Equity
As shareholders' equity is measured as a firm's total assets minus its total liabilities, ROE reveals the amount of net income returned as a percentage of shareholders' equity. The return on equity measures a company's profitability by revealing how much profit it generates with the amount shareholders have invested.
- 2007 - $2.736 billion / $10.137 billion = 26.99%
- 2008 - $2.737 billion / $11.047 billion = 24.76%
- 2009 - $2.707 billion / $12.640 billion = 21.45%
- 2010 - $2.563 billion / $13.560 billion = 18.90%
- 2011 - $2.495 billion / $14.385 billion = 17.34%
Exelon Corporation's ROE over the past five years is showing a declining trend. The current ROE of 17.34% is 55.56% lower than the 2007 ROE of 26.99%. As the ROE is declining this reveals that the company is generating less profits compared to shareholders' equity.
11. 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.
Even though the capital expenditures have increased over the past five years, Exelon's free cash flow has been consistently positive.
- 2007 - $4.496 billion - $2.674 billion = $1.822 million
- 2008 - $6.551 billion - $3.117 billion = $3.434 billion
- 2009 - $6.094 billion - $3.273 billion = $2.821 billion
- 2010 - $5.244 billion - $3.326 billion = $1.918 billion
- 2011 - $4.853 billion - $4.042 billion = $811 million
The latest number, which is on the plus side, indicates that Exelon has enough cash to develop new products, make acquisitions, pay dividends and reduce debt.
12. 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, it shows up as a negative number in the numerator in the cash flow margin equation. This means that even as the company 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.
Exelon's cash flow margin is positive, so it does not have to take these measures to continue operating.
- 2007 - $4.496 billion / $18.916 billion = 23.77%
- 2008 - $6.551 billion / $18.859 billion = 34.75%
- 2009 - $6.094 billion / $17.318 billion = 35.19%
- 2010 - $5.244 billion / $18.644 billion = 28.13%
- 2011 - $4.853 billion / $18.924 billion = 25.64%
Looking at the 5-year summary of Exelon's cash flow margin this reveals that the company is generating positive cash flow. As Exelon's cash flow margin is positive the company does not have to borrow money or raise money through investors in order to keep on operating.
In analyzing Exelon Corp's earnings growth over the past five years, you can see, after a very strong 2007 in which the earnings shot up 71.85% compared to 2006, the earnings have tailed off and decreased every year since then.
As illustrated above, the listed profit margins provide very consistent results with each other. They all seemed to have peaked in 2009 then have petered off over the past few years. The 2011 margins are all below their current 5 year averages.
When analyzing the ROA and ROE over the past 5 years we can see that they have both been trending lower. These ratios indicate that the company has been less efficient at using the company's assets to generate earnings, and that the company is generating less profits compared to shareholders' equity.
Exelon is showing positive cash and positive cash flow margins. In 2011, the company reported positive cash at $811 million. The company's cash flow margin showed strong results at 25.64%; this implies that the company has the ability to develop new products, make acquisitions, pay dividends and reduce debt without having to borrow or raise money to maintain operations.
The analysis of Exelon's profitability reveals very mixed results. The earnings have been decreasing since 2007, the profitability margins listed above have shown a peak in 2009 then a couple years of decline, the ROA and ROE have both been trending lower but the cash flow and cash flow margin are showing strong results. The metrics listed above reveal Exelon's mixed results in regards to profitability.
For more fundamental analysis on Exelon Corp. please read my article:
For other excellent articles on Exelon Corp by other authors please read:
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.