Operating income is essentially another term for EBIT, or earnings before interest and taxes. It is a company’s profits (revenue - COGS) minus operating expenses and depreciation. Operating income is different from net income in that it does not account for expenses such as taxes, interest from debt payments, or outside business activities. It offers a pure look at how a company effectively generates cash from internal operations. Continue reading...
Operating leverage is a measure of how critical each sale of a company is to overall cash flow. If a company has high operating leverage, it means that it relies on fewer sales with very high gross margins, versus a company with low operating leverage that experiences higher levels of sales with lower gross margins. As an example, a convenient store has less operating leverage than a business that sells yachts. Continue reading...
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...
Operating expenses are the costs a company incurs as a part of everyday business operations. The goal of most every management team is to figure out how a company can minimize operating expenses while maximizing production and profitability. Operating expenses can involve buying inventory, the cost of running machines, rent, payroll, and so on. What it costs a company to undergo normal business operations and output. It is sometimes referred to as OPEX. Continue reading...
Income from operations will be the net income which is solely focused on revenue from operations minus the cost of operations. It excludes gains or losses from minority interest investments, or sale of assets. Income from Operations is also called Net Operating Income (NOI). In accounting terms it is arrived at by subtracting operating expense from gross profit, where gross profit is net sales minus cost of goods sold. Continue reading...
Operating margin is a ratio (expressed as a percentage) that indicates how much a company makes for each dollar of sales. It can be calculated by dividing a company’s operating income by net sales, and generally a company that has a high and consistently improving operating margin is thought to be healthy. Operating margin can be looked at in terms of the overall company, or in a more focused vacuum - such as analyzing the operating margin of a new clothing line or an experimental sales project. Continue reading...
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...
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...
Operating cash flow is the amount of cash a company is able to generate from its operations - i.e., how much real cash flow is being generated after accounting for expenses. It is calculated by adjusting net income for items like depreciation and changes in inventory. A company’s OCF is an important metric in determining whether it can generate cash flow without requiring external financing. The timeliness and frequency of cash flows is important as well, in that a company ideally produces consistent and favorable OCF. Continue reading...
The operating cash flow ratio, or OCF ratio, is used to measure whether a company’s cash flows are sufficient to cover current liabilities. It essentially measures how many times a company can use cash flow from operations to cover debt expenses. It can be measured by dividing a company’s cash flow from operations by its current liabilities. Companies with high (relative to their peers or other companies in the sector OCF ratios are generally in good financial health, meaning they can adequately cover ongoing liabilities with cash flow from operations. Continue reading...
Open interest is a measurement of the outstanding open positions in a derivative security. Strong open interest means the derivative will have high liquidity. Open Interest is not the same thing as Trading Volume, but it does give an indication of liquidity and activity in a derivative. Open Interest is the number of open positions for a derivative, like an option. The Options Clearing Corporation tallies up the ‘open interest’ numbers, but they are not posted until the morning following the count. Open Interest isn't necessarily indicative of a bullish or bearish forecast for the underlying security, but it does generally mean that the option will have high liquidity and that a seller will be able to find a buyer. Continue reading...
When trading options, the language is slightly different than other transactions. You might be “opening” or “closing” a position with each trade. If you buy a put or call option, your ticket with say “buy to open” since you are opening a position and increasing the open interest on the underlying. Open interest is similar to trade volume in the stock markets, but it only increases with the number of outstanding positions interested in the outcome of the movements of the underlying security, and does not increase with each trade like trading volume. Continue reading...
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...
An open-end fund is a collective investment product where the issuer can redeem or issue shares at any time. Most mutual funds are open-end funds. Since the issuers can redeem or issue new shares at any time, they can meet the needs of investors very fluidly - buying back shares if an investor wishes to sell, or issuing new ones if demand rises. A manager also has the option to ‘close’ an open-end fund if they feel the fund 06has grown too large to allow new investors. Most mutual funds start out as open-end funds. Continue reading...
Generally associated with mutual funds and exchange traded funds, the expense ratio represents the total annual management fee. The expense ratio is the annual management fee charged to shareholders by ETFs and mutual funds. The annual fee typically comprises the annual management fee, 12b-1 fees (which are associated with research costs), operating costs, and all other administrative type fees that go into the product. The expense ratio encompasses all of these fees as one percentage. Continue reading...
When budgeting for companies, some expenses are fixed overhead and some are variable, which depend on the amount of work being done. The direct cost of materials and labor are a good example of variable costs that will fluctuate with production levels. There may be an equation that the company can use to reliably predict these variable costs, but they are not fixed costs. From an accounting perspective, of course, these costs would be in separate sections. Fixed costs include warehousing, depreciation, insurances, rent, taxes, salaries, and so forth. These can be put into the budget before anything else happens or any orders have been taken for the year. The variable costs must be taken into account on the fly. Continue reading...
Depreciation is the accounting practice of recording the decreasing value of a fixed asset, such as a building or piece of equipment, over time, or, effectively, spreading the tax deduction for the cost of the asset over time. The IRS has created set schedules which describe the number of years over which a business can amortize the cost of a business asset for the purpose of tax deductions. The number of years is different for each type of asset or equipment. Continue reading...
Also called net operating margin, return on sales can indicate how well a company makes use of its sales revenue. By dividing Operating Profit by Net Sales, we can arrive at the Return on Sales. Essentially what we’ve done is broken down profits on a per sales basis. We can see what percentage of sales ends up as profit, or, on the other side of the coin, how much profit is generated per unit of sales. This can be useful for a comparison of companies of different sizes, because it excludes their assets, capital structures, taxes, and interest. Continue reading...
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...
The cash flow to debt ratio measures a company’s operating cash flow versus its total debt. It is a useful tool for measuring a company’s ‘coverage,’ which looks at how well equipped a company is to meet its ongoing debt obligations (interest payments, for example) based on the amount of cash it generates through sales/service. There are different methodologies for calculating the ratio, but the most conservative are using free cash flow as the numerator and all redeemable debt (short-term, long-term, preferred stock) as the denominator. Continue reading...