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What is Net Operating Profit After Tax?
Net Operating Profit After Tax (NOPAT) is a way to measure profits that excludes the impact of debt financing (via tax benefits and costs). The easiest way to think about Net Operating Profit After Tax is as a company’s profit if it were unleveraged, i.e., if it had no debt. There are costs associated with debt but also tax benefits, so there’s some give and take. The reason an analyst might use NOPAT is to gain a more accurate look at the operating efficiency of a leveraged companies, since it excludes the tax savings many companies get because of existing debt. Continue reading...
What is a Profit?
In its simplest form, a profit is the revenue or income gained from an entity after all expenses/overhead is accounted for. In business, a company deals with a number of expenses - operating expenses (the cost of doing business), fixed costs (overhead), salaries and benefits, legal fees, and so on. If a company’s revenues exceed all of these costs combined, the company is considered profitable. A profit is also known as a company’s bottom line, net earnings, or net profit. Continue reading...
What is Return on Net Assets?
Return on Net Assets is a calculation used to determine how well a company performs, relative to its resources. Return on Net Assets gives investors an idea of how well a company uses its resources to generate profits. Net assets includes not only fixed, tangible assets, but also the net working capital of a business. Working capital is defined as Current Assets minus the Current Liabilities of the business. The net profits for a period are divided by the net assets to arrive at the Return on Net Assets. Continue reading...
What are Net Sales?
Net sales are the amount of sales that will actually be counted towards a company’s bottom line, meaning they account for goods returned or damaged goods. If a good is fully delivered to a customer and any return policy is expired, the good can be booked as a net sale for the company. Therefore, net sales gives a more accurate picture of the actual sales generated by the company, or the money that it expects to receive. Continue reading...
What is Net Income?
Net income is the amount of earnings left over once expenses have been deducted from sales. In short, it is the net amount of profit or loss. It is calculated by taking total earnings in a period (such as a quarter), and deducting all elements of the cost of doing business (labor, depreciation, fixed expenses, overhead, etc…) Net income is ultimately a measure of a company’s profitability, and its calculation should be scrutinized closely to ensure all expenses are being accounted for accurately. Continue reading...
What is Net Worth?
Net worth is the total value of a person or entity’s assets, minus all of their outstanding liabilities. Net worth is most often used in personal finance, with the simple calculation of Net Worth = Assets - Liabilities. In the business context, net worth is also known as book value or shareholder’s equity, and those with rising book value mean they are generating more revenue and obtaining property more quickly than they’re accumulating debt. A rising market value does not necessarily correlate to a rising net worth, as the market may bid up a company’s market capitalization absent profit growth. Continue reading...
What is Accounting Profit?
Profit is a term that is synonymous with earnings and net income, and it is basically what is left of revenues after expenses. All of these are basically computed the same way: gross revenue minus the cost of goods sold, business expenses, and taxes. Some variations on each of these will choose to look at the numbers before certain expenses, such as taxes. For example, “gross” accounting profit could be defined as revenue minus cost of goods sold, while “operating” profits would also subtract the costs of business expenses and operations, and “net” profits would also subtract taxes. Continue reading...
What are Profitability Ratios?
Profitability ratios are useful analytical tools to evaluate a company’s ability to generate profits relative to all costs and expenses. A company that has high profitability ratios relative to competitors/peers, or a company that has demonstrated to improve their profitability ratios over time, is generally viewed as a healthy and attractive company from an ownership perspective. Some examples of profitability ratios are profit margin, return on assets, and return on equity. Continue reading...
What is an Operating Profit?
Operating profit is a company’s profit from its business operations, and can be calculated by taking gross profits minus operating expenses. Operating profit is synonymous to operating income, and represents a company’s profitability from its core operations, which excludes earnings from other investments or interests and also does not factor the impact of taxes or interest. Continue reading...
What is Profit Margin?
Profit margin is a profitability ratio that measures, as a percentage, how much a company keeps per sale. Profit margin can be calculated by dividing net income by sales. A higher profit margin means a company keeps high percentage of each dollar sold as profit. For example, a 50% profit margin means that for every dollar earned, a company retains $0.50. It is often helpful for an analyst to look at how a company’s profit margins have changed over time, to measure whether it is becoming more efficient in the sales of goods. Continue reading...
What is Tangible Net Worth?
Tangible Net Worth is another word for Book Value or Net Asset Value. Only the tangible assets and cash are included, and any liabilities are subtracted. Any depreciation that would otherwise be included for accounting purposes is added back in. Tangible net worth, or book value, is the remaining balance after intangible assets and all liabilities are deducted from net assets. This is the amount that will be divided among shareholders in the event of a company liquidation, and the minimum that the company would be purchased for by an acquiring company. Shareholders can use this as a bare-minimum estimation of the value of their shares. Continue reading...
What is Net Operating Income?
Net Operating Income (NOI) is a measure of profitability most often used with income producing real estate businesses. In the real estate world, net operating income is calculated by taking all revenues generated by a property (rent, parking, etc…) from all of the operating expenses needed to upkeep the property, which can include insurances, taxes, maintenance, utilities, and so on. Net Operating Income is a before tax figure, so does not include principal and interest payments on loans, depreciation and amortization. If the NOI figure is negative, it is referred to as a net operating loss (NOL). Continue reading...
How Do I Calculate my Net Worth?
Calculating your net worth is a simple and worthwhile endeavor, and should be done once a year to measure your progress. Generally speaking, your net worth is the sum of all of your assets, minus the sum of your liabilities. For example, to calculate your net worth, you would need to add up the dollar values of all of your assets – usually consisting of your house, your cars, savings accounts, retirement accounts, CDs, cash, etc…, and your most valuable possessions (you don’t need to include your desk lamp into the calculations). Continue reading...
What is the 'Non-Current Assets to Net Worth' Ratio?
The non-current assets to net worth ratio will give the analyst an idea of how much of a company’s value is tied-up in non-current assets. As a quick refresher, ‘non-current assets’ are those that most likely will not convert to cash within a year’s time, also known as a long-term asset. Where a company’s non-current asset to net worth ratio lies depends on the industry, but generally speaking a company wants to avoid having that ratio rise above 1 to 1.5. That means the company is highly illiquid, and could be vulnerable in the event of an economic shock. Continue reading...
What is Net Present Value?
Net Present Value (NPV) is the difference between present value of net inflows versus the present value of outflows (expenses). The net present value is a good analyst tool for measuring the profitability of a company’s project or new undertaking, like expansion into a new market. It measures the anticipated cash inflows (revenues) from the undertaking versus the anticipated costs of the new project (also in present value terms). Continue reading...
What is the 'Fixed Assets to Net Worth' Ratio?
The fixed assets to net worth ratio is a calculation intended to measure the solvency of a company. It generally tells the analyst what percentage of a company’s assets are cash vs. fixed assets. To calculate the ratio, you divide net fixed assets into net worth. A fixed assets to net worth ratio greater than 0.75, generally, means that a company has too much of their net worth tied up in assets like equipment, machinery, land, and so on. Continue reading...
What is a Loss?
A loss refers to reduction in the value of an investment, or in business terms, to having expenses outweigh revenues. In a company’s fiscal year, if their operating and total expenses outweigh their revenues, they are operating at a loss. If those companies are not supported by private capital and operate at a loss for too long, it can easily lead to bankruptcy or closure. Newer businesses often run at a net loss for the first few years, while they rush to build labor and capital infrastructure, with costs such as equipment, buildings, technology, employees, and rights. Continue reading...
What is a Money Purchase/Profit Sharing Plan?
Money Purchase plans and Profit Sharing plans are two types of Defined Contribution plans that can be used at a business, together if desired. Both of these are Defined Contribution plans, which means that only the terms of the contributions to the plan are defined in the plan document. This is different than Defined Benefit plans, which specifically define the benefit due to an employee at retirement, which is generally a monthly pension payment. If an employer wants to use both a Money Purchase plan and a Profit Sharing plan, it is possible, but since both of them are Defined Contribution plans, they will be limited in aggregate to the allowable defined contribution limits for employer contributions. Continue reading...
What does net long mean?
Investors are net long when they own more long positions than short positions in a security, derivative, or fund. It could mean that a fund manager, for instance, is net long on all of the holdings in the funds, i.e., the fund holds more long positions than short positions. Some funds could be the opposite and be net short. A long position - or to be “long a stock” - means that an investor has share ownership and will receive economic benefit if the share price rises, and vice versa. Creating and maintaining a long position is simple: an investor buys and owns the investment. Some asset managers will employ a “long-only” strategy, only buying and selling securities in the portfolio as a management strategy - they will not use options or shorting strategies as a result. Continue reading...
What is Profit and Loss (P&L) Statement?
A Profit and Loss Statement, also referred to as an “income statement,” is a corporate statement that summarizes the revenues, costs and expenses incurred by a company during a specific time period, such as a quarter or a fiscal year. The main difference between a P&L statement and a balance sheet is that the P&L is designed to show changes in line items over the period analyzed, versus a balance sheet which simply shows a comprehensive snapshot of a company’s asset and liabilities on a set date. Continue reading...