Chapter 44: Comparing performance

Profit

= Earnings/net income - everything spent to produce it

Earnings

Or net income, Profits after tax, money produced

Profitability

Level of profit in relation to what is required to produce it. It shows how effectively a company can turn sales into profits and there are different indicators of profitability, like EBITDA.

EBITDA

‘Earnings before interest, tax, depreciation and amortization’. Comparing the EBITDA of different companies helps you look at how well they are doing in their core business (like sales and production), before considering things like taxes or interest payments. This gives a clearer picture of how they are performing just from their main activities.

Operating performance

Answers the question

Investment ratios

The relationship of one key figure (financial figure) to another, such as profits, earnings, market value.

ROA

Return on assets, an investment ratio where you look at a company’s profits for the year in relation to the value of its assets, to see how well managers are using those resources.

Assets

Everything a company owns that has value and can help generate income (cash, buildings, equipment)

Capacity

The maximum number of products a company can produce in a particular period.

Operating at full capacity

Using all of its available resources (machines, staff, space) as efficiently as possible

Spare capacity

Refers to the unused production ability a company has. It means the business could produce more goods or services without needing extra resources, like machines or staff.

Sweating its assets

(informal) when a company uses relatively few resources compared to similar companies to generate a higher level of profits, you can say that that company is sweating its assets

Knowledge workers

Are people whose main job involves thinking, analysing, and working with information rather than doing physical or manual tasks. E.g. engineers, doctors, accountants, researchers …

Physical assets

Tangible items a company owns that have value and are used in its operations. E.g. machinery, vehicles, tools, equipment …

ROE

‘Return on equity’, it measures how well a company’s managers are using shareholders’ equity to invest in activities and resources that generate profit for shareholders. (e.g. if in a particular year

Shareholders’ equity

The owner’s claim on company assets after all debts are paid. (It represents the amount that would be returned to shareholders if all assets were sold and all liabilities settled.)

Income leverage

The amount of a company’s borrowing (like loans, bonds …) and the interest it pays on this in relation to its shared capital (can be expressed as a percentage or an interest cover)

Interest cover

The number of times it could pay the interest out of its operating profit

Highly/heavily leveraged

A company with a lot of borrowing in relation to its shared capital is highly/heavily leveraged (Synonym

Over-leveraged

A company that has difficulty in making payments on its debt is over-leveraged.

Deleverages

A company that reduces the amount of debt that it has deleverages

Leverage

Or gearing