Profit Performance and Alternative Operating levels

01/09/2021 0 By indiafreenotes

Profit Performance

Financial performance is a subjective measure of how well a firm can use assets from its primary mode of business and generate revenues. The term is also used as a general measure of a firm’s overall financial health over a given period.

Gross margin ratio and contribution margin: What is the business’s gross margin ratio (which equals gross profit divided by sales revenue)? Even a small slip in its gross margin ratio can have disastrous consequences on the company’s bottom line. Stock analysts want to know the business’s contribution margin, which equals sales revenue minus all variable costs of sales (product cost and other variable costs of making sales).

Analysts and investors use financial performance to compare similar firms across the same industry or to compare industries or sectors in aggregate.

Trends: How does sales revenue in the most recent year compare with the previous year? Higher sales should lead to higher profit, unless a company’s expenses increase at a higher rate than its sales revenue. If sales revenue is relatively flat from year to year, the business must focus on expense control to help profit, but a business can cut expenses only so far.

Other ratios: Based on information from a company’s most recent income statement, how do gross margin and the company’s bottom line (net income, or net earnings) compare with its top line (sales revenue)? It’s a good idea to calculate the gross margin ratio and the profit ratio (net income divided by sales revenue) for the most recent period and compare these two ratios with last period’s ratios.

The income statement culminates in net income for the period, but two other specific profit calculations also offer your business leaders and potential creditors critical information about the companies’ income-earning abilities: Gross profit and Operating profit.

Net Profit

Your income statement finally reaches net profit or loss when irregular income and expenses are taken from operating profit. Legal costs such as patent filings or settlements are examples of irregular, one-time expenses. Sales of buildings and equipment are examples of irregular income. While net profits are ideal, one-time expenses do not necessarily affect long-term profitability. Net profits are also used to calculate the net profit margin.

Gross Profit

Gross profit is calculated in the income statement’s first section. It is simply the total amount of money you took in your revenue minus the cost of the goods you sold. The higher your gross profit, the more likely you are to cover your fixed costs and earn income for the period. This initial section also is useful in calculating your gross profit margin ratio.

Operating Profit

In the operating income section of the statement, fixed operating costs are subtracted from gross profit to calculate operating profit for the period. Fixed costs include building and equipment costs, utility expenses and other costs not directly tied to production. A strong operating profit is a good sign of financial health, because it represents your earnings from core business activities. Operating profit also is used to calculate operating profit margin.

Profit Performance Monitor estimates the economic cost of:

  • Lack of confidence in the APC performance.
  • Clamp MV, CV limits, dropped MVS related to short term operations, equipment, or instrument issues.
  • Lack of awareness of the overall performance impact.
  • Variance on operator skills.

Alternative Operating levels