How is that possible?

Discussion in 'Economics' started by forforex, Oct 8, 2006.

  1. forforex


    Who can explain me this:

    Enterprise value 735 mil
    Gross profit 111 mil
    Diluted EPS 1.07
    Qtrly Earnings grwth 93%
    Qtrly Revenue growth 6.4%??????????? I dont get this
    Return on Assets 2.4% ?????????????? i dont get this
    Return on equity 5.2% ??????????????? I dont get this

    How is that possible with all those statistics 111 mil profit and qtrly earning growth 93% revenue growth only 6.4%
    and they return on assets just 2.4%?????? What am I missing?
  2. v strange indeed and maybe mistake. to get the earnings growth to go up that much with paltry revenue growth i guess they found magical way to cut costs? what company is this?
  3. Which stock is it? It's not clear to me based on the information you provided that there is a problem here. There's nothing unusual in getting a big shift in profits off a 6.4% increase in sales.

    Profits are more volatile than revenue because in many companies a large fraction of costs is fixed. Let's say you make a widget and it costs you $40 for the people on the manufacturing line and $10 for materials. These costs are going to move pretty much in line with how many widgets you make. Let's assume that depreciation of $10, indirect labour (management, sales) of $20, promotions and advertising of $10 and rent of $10 are all fixed, though in reality these may move a little. That widget costs $100 to make. You can sell it for $110, which nets you a profit of $10. Now, if you sell 2 widgets instead of one, the labour and materials cost will double from $50 to $100 but the remaining costs will remain the same: $50. Your total costs are now $150 but your revenue is 2 x $110 = $220 so your profit is now $220- $150 = $70. Your sales doubled but your profit went up 7x. Nice eh? OK, it's an extreme and simplified example but it show the effects of operating leverage.

    It might not be operating leverage that's behind the change in profits, of course (it would help if you told us how much sales and profits increased in absolute terms quarter-on-quarter). For example, profits in the previous quarter might have been depressed by a one-off event like a strike or an extraordinary loss of some kind. Or maybe they got a payout for (e.g.) patents used by another company, or a sale of assets. Plenty of possible reasons.

    Return on assets is a measure of how productive your assets are - how much profit you can squeeze from them. So if you have $10 in net profit from sales of $100 and you use equipment and buildings and other assets that in total cost you $500 then roughly speaking your ROA is going to be $10/$500=2%. That's not great, but it does happen. If you had a clever engineer he might be able to work out how to do the same job using less equipment and buildings so that they cost you only $100. Then your ROA would be 10%. Remember that for a manufacturing company the asset base is usually pretty big because you need lots of things to make other things. Conversely a game software company might have almost no assets - their people are hired on short-term contracts, they lease their computers and they rent an office.

    Like I said, based on the info given, these figures are not so strange.

  4. Qtrly Earnings grwth 93% - company earned lots more money this quarter than same quarter previous year.

    Qtrly Revenue growth 6.4% - company sold more goods and services this quarter than same quarter previous year, maybe a lot more.

    Return on Assets 2.4% - company has $ 111 million / 0.024 = $ 4.625 billion in assets

    Return on equity 5.2% - company has $ 111 million / 0.052 = $ 2.135 billion in equity

    Debt is assets - equity $ 4.625 billion - $ 2.135 billion = $ 2.49 billion.

    The debt might be important. If the company reduced it's debt burden, or replaced high interest debt with lower interest debt then the savings might appear as an increase in earnings with small increase in sales revenue.

    You might examine the earnings of the previous year to learn if they are low.

    I am confused by "enterprise value" = $ 735 million since I calculate equity as $ 2.135 billion, about three times greater. You might examine how enterprise value is defined. Maybe enterprise value is a stock valuation.
  5. zdreg


    please explain why you don't do a search to find a definition of enterprise value?