Love, actually #2

We waded through most of the restated financial statement ratios in the first Love, actually blog post but there are still two relationships that need to tell their story.

Profit margin is almost the twin to net profit margin and I did not expect to see much of a difference between these two ratios.  Profit margin still shows how much profit can be extracted for every dollar earned by a firm but it just uses operating income instead of net profit after tax.  This allows us to focus on operating activities and ensure they are actually generating returns rather than them coming from financial activity.

2015 2014 2013 2012
Net Profit Margin -6.3% -0.9% -18.7% -3.5%
Profit Margin -6.05% -0.77% -18.48% -3.39%

The reason I did not expect to see much difference between the two profit ratios was because Clarius Group did not have many financial activities and only one item from other comprehensive income that was deemed operational.  However, this other comprehensive income (from foreign currency translation differences) being added in was enough to make the operating loss smaller.  As the operating loss is the numerator in the ratio, this infers the result will be smaller (which is good as we are dealing with losses) while the denominator is sales which stays constant across both ratios.  The tax expense and exclusion of net financial expenses also made a slight difference in the operating loss figure.

You can find a more in depth discussion about what financial statement items affected these ratios in The Holy Grail blog post.

Another set of twins are the total asset turnover ratio and the asset turnover ratio (ATO) from the restated financial statements.  The only difference being that ATO shows how efficient a firm is at using net operating assets to produce sales rather than total assets.

2015 2014 2013 2012
Total Asset Turnover 3.80 3.03 3.88 2.53
Asset Turnover 7.19 5.16 6.09 3.36

The results for the ATO are higher because net operating assets is a much smaller figure than total assets. As previously discussed, a smaller denominator leads to a larger ratio result.  the ATO shows that assets are being used even more efficiently because the turnover rate has increased.  As a manager you would have to be happy to see these ATO figures, although, I start to wonder if the 2013 and 2015 ATO are starting to stray into the “abnormal” zone.

The ATO also has an inverse relationship to the profit margin, just like the total asset turnover has with the net profit margin.  You can see a further discussion on asset turnover in my blog post Turning Over.


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