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Looking at profitability is a very important step in understanding a company. Profitability is essentially why the company exists and a key component in deciding whether 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 Exxon Mobil Corporation's (XOM) earnings and earnings growth, profit margins, profitability ratios and cash flow.

Over the past 5 years the economy and subsequently energy prices have been hit hard. Through the above-mentioned four main metrics we will get an idea about the company's profitability over past 5 years. We will also get an idea how hard Exxon was hit by the crisis and how well the company is recovering. By comparing this summary to other companies such as Chevron Corp (CVX), Total S.A. (TOT) and BP P.L.C (BP) who are in the same sector, you will be able see which has been the most profitable.

All material is sourced from Morningstar, and the Company webpage.

Earnings and Earnings Growth

1. Earnings = Sales x Profit Margin

  • 2010 - $383.221 billion x 7.95% = $30.460 billion
  • 2011 - $486.429 billion x 8.44% = $41.060 billion

Exxon's earnings increased from $30.460 billion in 2010 to $41.060 billion in 2011, an increase of 34.80%.

2. Five-year historical look at earnings growth

  • 2007 - $40.610 billion, 2.81% increase over 2006
  • 2008 - $45.220 billion, 11.35% increase
  • 2009 - $19.280 billion, 57.36% decrease
  • 2010 - $30.460 billion, 57.98% increase
  • 2011 - $41.060 billion, 34.80% increase

In looking at Exxon's earnings over the past five years, you can see how the economic crisis affected the earnings in 2009. In 2009 the company's earnings decreased by 57.36%. Even though the earnings decreased by over 50 percent the earnings still held up quite well with the company posting earnings of $19.280 billion. Since the low in 2009 the company has been showing strong signs of recovery and in 2011 the company reported earnings of $41.060 billion. This amount is still behind the 2008 peak reported earnings of $45.220 billion.

Profit Margins

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 Exxon's gross profits for the past two years:

  • 2010 - $383.221 billion - $262.298 billion = $120.923 billion
  • 2011 - $486.429 billion - $306.802 billion = $179.627 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 reviewing Exxon's gross margin over the past five years, we can see the impact the financial crisis had on the company's margin. The 5-year low for the gross margin was reported in 2009 with a margin of 31.82%. The 5-year high for the margin was in 2007 with a margin of 42.44%. The 2011 gross profit margin of 36.93% is just below the 5-year average of 36.44%.

  • 2007 - $171.700 billion / $404.552 billion = 42.44%
  • 2008 - $188.549 billion / $477.359 billion = 39.50%
  • 2009 - $98.817 billion / $310.586 billion = 31.82%
  • 2010 - $120.923 billion / $383.221 billion = 31.55%
  • 2011 - $179.627 billion / $486.429 billion = 36.93%

As the gross margin is slightly below the 5-year average this implies that management has been slightly less efficient in the company's manufacturing and distribution during the production process over the past 5 years.

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 - $52.959 billion
  • 2011 - $73.257 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.

Over the past five years, Exxon's operating margin reveals a dip in 2009 but a recovery back to 15.06% in 2011. The 2011 operating margin of 15.06% is still below the peak margin of 17.42% reported in 2007.

  • 2007 - $70.474 billion / $404.552 billion = 17.42%
  • 2008 - $81.750 billion / $477.359 billion = 17.13%
  • 2009 - $34.777 billion / $310.586 billion = 11.20%
  • 2010 - $52.959 billion / $383.221 billion = 13.82%
  • 2011 - $73.257 billion / $486.429 billion = 15.06%

The 2011 operating margin of 15.06% is above the 5-year average of 14.93%. This implies that there has been a slightly higher percentage of the total sales left over after paying for variable costs of production such as wages and raw materials compared to the 5-year average.

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.

Like the Operating Margin, Exxon's net profit margin revealed a strong dip in 2009 and a recovery. The 2011 net profit margin of 8.44% is slightly above the 5-year average of 8.42%.

  • 2007 - $40.610 billion / $404.552 billion = 10.04%
  • 2008 - $45.220 billion / $477.359 billion = 9.47%
  • 2009 - $19.280 billion / $310.586 billion = 6.21%
  • 2010 - $30.460 billion / $383.221 billion = 7.95%
  • 2011 - $41.060 billion / $486.429 billion = 8.44%

As the 2011 net profit margin of 8.44% is slightly above the 5-year average of 8.42%, this implies that there has been a very slight increase in the percentage of earnings that the company is able to keep compared to the company's 5-year average.

Profitability Ratios

8. 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."

The 2011 ROA of Exxon has not rebounded enough over the past couple of years to exceed the 2008 peak ROA of 19.83%. The 2011 ROA of 12.40% is below the 5-year average of 13.46%.

  • 2007 - $40.610 billion / $242.082 billion = 16.77%
  • 2008 - $45.220 billion / $228.052 billion = 19.83%
  • 2009 - $19.280 billion / $233.323 billion = 8.26%
  • 2010 - $30.460 billion / $302.510 billion = 10.07%
  • 2011 - $41.060 billion / $331.052 billion = 12.40%

As the 2011 ROA of 12.40% is below the 5-year average of 13.46%, this implies that management has been less efficient at using the company's assets to generate earnings compared to its 5-year average.

9. 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 - $40.610 billion / $121.762 billion = 33.35%
  • 2008 - $45.220 billion / $112.965 billion = 40.03%
  • 2009 - $19.280 billion / $110.569 billion = 17.43%
  • 2010 - $30.460 billion / $146.839 billion = 20.74%
  • 2011 - $41.060 billion / $154.396 billion = 26.59%

Like the rest of the margins and ratios Exxon's ROE has revealed a strong dip in 2009. Over the past three years, the ROE has rebounded. As the ROE has gained strength over the past three years, this reveals that there has been an increase in how much profit has been generated compared to the amount that shareholders have invested.

Cash Flows

10. 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.

Over four of the past five years, Exxon's free cash flow has remained positive.

  • 2007 - $52.002 billion - $15.387 billion = $36.615 billion
  • 2008 - $59.725 billion - $19.318 billion = $40.407 billion
  • 2009 - $28.438 billion - $22.491 billion = $5.947 million
  • 2010 - $48.413 billion - $26.871 billion = $21.542 billion
  • 2011 - $55.345 billion - $30.975 billion = $24.370 billion

Over the past 5 years Exxon Mobil has had positive cash flow. This indicates that Exxon has enough cash to develop new products, make acquisitions, pay dividends and reduce debt.

11. 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.

As Exxon's cash flow margin is positive, it does not have to take the above measures to continue operating.

  • 2007 - $52.002 billion / $404.552 billion = 12.85%
  • 2008 - $59.725 billion / $477.359 billion = 12.51%
  • 2009 - $28.438 million / $310.586 billion = 9.16%
  • 2010 - $48.413 billion / $383.221 billion = 12.63%
  • 2011 - $55.345 billion / $486.429 billion = 11.38%

Summary

In looking at Exxon's earnings over the past five years, you can see how the economic crisis affected the earnings in 2009. In 2009 the company's earnings decreased by 57.36%. Even though the earnings decreased by over 50 percent the earnings still held up quite well with the company posting earnings of $19.280 billion. Since the low in 2009 the company has been showing strong signs of recovery and in 2011 the company reported earnings of $41.060 billion. This amount is still behind the 2008 peak reported earnings of $45.220 billion.

As illustrated above and using a 5-year time frame, the listed profit margins are showing signals of a good recovery since 2009. Over the past 3 years the company is indicating a good recovery and also indicating that the company is increasing its profit margins.

The ROA and ROE indicate similar results in that both the ROA and ROE are showing strengthening in the profitability of the company after the crisis.

With free cash flow and the free cash flow margin both displaying positive cash, Exxon has enough cash to develop new products, make acquisitions, pay dividends and reduce debt without having to borrow or raise money to maintain operations.

The analysis of Exxon's profitability indicates a strong company that is recovering from its 2009 lows and gaining strength moving forward. Over the past three years, the earnings as well as the other listed profitability margins and ratios have rebounded nicely. The margins have not exceeded their 5-year ratios but are gaining strength compared to their 3 year ratios. These trends show strong signals for the future as Exxon has a strong amount of free cash at hand, which means the company will likely continue to grow for the foreseeable future.

To see more articles on Exxon please read: Analyzing Exxon's Debt And Risk and Exxon Mobil: Inside The Numbers.

Source: Exxon Mobil: Profitability Analysis