EBITDA Margin, etc ...
No doubt I’ll probably be "preaching to the converted" for most who may read this Message, but judging by several exchanges I’ve had with some on my Board, there could be those who might find the following company analysis suggestion useful.
When scrutinizing an Industrial type company’s Financial Statements I suggest the first thing you look at is the Income Statement. And what you need to initially look at are the following 4 items ...
(1) TURNOVER (Also called "Sales" or "Revenue")
(2) COST OF SALES (CoS)
(3) SELLING, GENERAL & ADMINISTRATION EXPENSE (SG&A)
(4) RESEARCH & DEVELOPMENT EXPENSE (R&D)
The first step is to add (2), (3) and (4) together and subtract it from (1). That will give you EBITDA (Earnings Before Interest, Taxation, Depreciation and Amortization).
You then divide that number by TURNOVER and multiply by 100 to get a percentage. That’s your EBITDA Margin.
It tells you what percentage of TURNOVER is left over after deducting those COMPULSORY Expenses that any Industrial type company needs to cater for.
Needless to say, the higher this percentage the better, because one want to get as much of a company’s Gross Turnover ending up at the "Bottom Line" as possible.
You can regard this ratio calculation as the first FILTER of a company’s potential Profit on its way down the Income Statement until it eventually reaches the "Bottom Line".
What you should do next is to calculate two more ratios ...
(a) Divide (2) by (1) and multiply by 100. This will tell you what percentage Cost of Sales is of Turnover.
(b) Add (3) and (4) together and divide it by (1) and multiply the result by 100. This will similarly tell you what percentage (3) and (4) is of Turnover.
Once you’ve done all that, you should repeat it for the past 3 or 4 Quarterly Financial Results, and for the last 3 or 4 Annual Financial Results.
You will then be able to identify whether or not the EBITDA Margin is rising or falling, and what part CoS and the sum of SG&A and R&D are playing in the production of that company’s profit.
A good example of this can be seen in Message #461 below, where CROX’s EBITDA Margin has fallen in the last Quarter due, primarily, to a fall in Turnover with a concomitant rise in CoS expense.
Therefore more potential Profit was "filtered" out at the EBITDA level in Dec.07 than was the case in Sep.07.
I suspect that may adversely affect CROX's share price, "going forward".
I hope that there are those who will find the above informative and of some interest. |
