When performing a profitability ratio analysis, it is essential to take into account companies that operate in the same industry. In fact, based on the industry the profitability ratios might vary quite a lot. Even though below we have five tech companies, those operate in different contexts and competitive landscapes. In part, their business models overlap.
Take Microsoft, which also serves the advertising industry with Bing. Also, a proper comparative analysis should take into account previous years. For this infographic however it is a useful exercise to appreciate how profitability metrics can change according to the industry you’re taking into account.
The key metrics we take into account for the infographic are:
That is a measure of the operational efficiency of a company given by operating income over net sales. This measure is critical because it tells us the ability of a company to improve its operational efficiency over time. In fact, other metrics, like the Net Margin might be biased by factors like taxes and interest expenses, that are more tied to the company’s ability to find the right tax mix and financial mix. Instead, with the operating margin, we have a quick glans at the company’s operational efficiency.
It measures how good a company is in converting revenues in profits. This is a reasonable assessment of the overall business. However, when we refer to profits, it is crucial to understand the difference between cash. In fact, the income statement primary purpose is to understand the operations of an organization and not necessarily understand how much cash it has in the bank. For that, there is the cash flow statement. This metric is given by net income over net sales.
The return on assets tells you how much earnings a company generates from invested capital. Its formula is Net Income over Total Assets. It tells you how much profits are made for each additional dollar of capital invested in acquiring assets.
Handpicked case studies:
- How Does PayPal Make Money? The PayPal Mafia Business Model Explained
- How Does WhatsApp Make Money? WhatsApp Business Model Explained
- How Does Google Make Money? It’s Not Just Advertising!
- How Does Facebook Make Money? Facebook Hidden Revenue Business Model Explained
- Marketing vs. Sales: How to Use Sales Processes to Grow Your Business
- The Google of China: Baidu Business Model In A Nutshell
- Accenture Business Model In A Nutshell
- Salesforce: The Multi-Billion Dollar Subscription-Based CRM
- How Does Twitter Make Money? Twitter Business Model In A Nutshell
- How Does DuckDuckGo Make Money? DuckDuckGo Business Model Explained
- How Amazon Makes Money: Amazon Business Model in a Nutshell
- How Does Netflix Make Money? Netflix Business Model Explained
Other resources for your business:
- What Is a Business Model? 30 Successful Types of Business Models You Need to Know
- What Is a Business Model Canvas? Business Model Canvas Explained
- Blitzscaling Business Model Innovation Canvas In A Nutshell
- What Is a Value Proposition? Value Proposition Canvas Explained
- What Is a Lean Startup Canvas? Lean Startup Canvas Explained
- How to Write a One-Page Business Plan
- The Rise of the Subscription Economy
- How to Build a Great Business Plan According to Peter Thiel
- What Is The Most Profitable Business Model?
- The Era Of Paywalls: How To Build A Subscription Business For Your Media Outlet
- How To Create A Business Model
- What Is Business Model Innovation And Why It Matters
- What Is Blitzscaling And Why It Matters
- Snapshot: One Year Of “Business Model” Searches On Google In Review
- Business Model Vs Business Plan: When And How To Use Them
- The Five Key Factors That Lead To Successful Tech Startups
- Top 12 Business Ideas with Low Investment and High Profit
- Business Model Tools for Small Businesses and Startups