tech-giants-profitability

Are Tech Companies Profitable? Visualizing Tech Giants Key Profitability Ratios

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:

Operating Margin

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.

Net Margin

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.

Return on Equity

This metric measures how much profit a company generates with shareholders investments
Its formula is given by the Net Income over Shareholder’s Equity. Once again, net profit is not the same as cash. Therefore, if you want to understand how much money shareholders are getting back from the company’s operations, the cash flow statements is the place to look.

Return on Capital Invested

The return on capital invested tells you how much return a company makes on its invested money. Its formula is Net Operating Profit After Tax/ Invested Capital (Total Assets – Excess Cash). This is an important metric to assess the ability over time of a company to generate value more holistically.

Return on Assets

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.

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Gennaro Cuofano

Creator of FourWeekMBA.com | Head of Business Development at WordLift.io | International MBA

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