Calculating Net Profit Margin

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Money Magazine Hoss continues his series on financial performance ratio calculations with today's post highlighting Net Profit Margin. This ratio tells the potential investor how much profit a company generates for every $1 of revenue. It is considered to be a measurement of a company's efficiency in converting revenue to profit. Investors normally prefer companies with a high net profit margin. Formula as follows:

Net Profit Margin = Net income/Revenue * 100 %

We will continue using the income statements of Amazon, GM and Google to provide examples.

Amazon's Net Profit Margin :

2006: $190,000/$10,711,000 * 100 = 1.8%

2007: $476,000/$14,835,000 * 100 = 3.2%

2008: $645,000/$19,166,000 * 100 = 3.4%



GM's Net Profit Margin:



2006: -$1,978,000/$207,349,000 * 100 = -9.5%

2007: -$43,297,000/$181,122,000 * 100 = -24%

2008: -$30,860000/$148,979,000 * 100 = -20.7%


Google's Net Profit Margin:



2006: $3,077,446/$10,604,917 * 100 = 29%

2007: $4,203,720/$16,593,986 * 100 = 25.3%

2008: $4,226,858/$13,174,044 * 100 = 32.1%


Once again, as in Money Magazine Hoss's previous financial indicator examples, when we compare the Net Profit Margin of the three companies, Google without question has the best performance.


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Interest Coverage Ratio

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Interest coverage ratio is the topic of today's Hoss Cents Free Financial Money Magazine. This ratio indicates a company's capacity to make its interest payments (on all outstanding debts) with its earnings before interest and taxes. Think of it this way, how often could you make the interest payments all your outstanding debts with your annual pre-tax income? This is of great importance to bond and preferred stock investors. It gives these investors an indication of the company's financial stability and how far earnings can fall before possible bond or preferred stock payment defaults.

The higher the ratio the less a company is burdened by debt expense. A company's ability to meet interest expenses becomes suspect when the interest coverage ratio is 1.5 or lower. An interest coverage ratio below 1 is a strong red flag, as the company does not have sufficient revenues to pay its interest expenses. Exception: Some companies may have no debt and therefore no interest payments, in which case their Interest coverage ratio would be 0, which of course is excellent.

Interest coverage ratio is calculated as follows:

EBIT (earnings before income and taxes) divided by Interest Expense.

Money Magazine Hoss will again, as in Calculating Gross Profit Margin Percentage and Calculating Operating Margin, use the Income Statements of Amazon, Google and GM for demonstrating how to calculate interest coverage ratio.

Interest Coverage Ratio for Amazon:

2006: $455,000/$78,000 = 5.8

2007: $737,000/$77,000 = 9.4

2008: $972,000/$71,000 = 13.7

In all three years Amazon's Interest Coverage Ratio is well above the warning level of 1.5. In addition the ratio has increased each year which is a positive signal.

Interest Coverage Ratio for GM:



2006: $11,998,000/$16,945,000 = .71

2007: $-3,351,000/$2,902,000 = -1.15

2008: $-27,043,000/$2,345,000 = -11.53

If you considered buying GM stock in 2006, the interest coverage ratio of .71 would have been a warning sign that things were not at all well with this company. The continued deterioration in 2007 and 2008 confirmed this warning sign: Definitely a poor investment. In fact as we all now know, GM subsequently filed for Chapter 11 bankruptcy protection.

Interest Coverage Ratio for Google:



2006: $4,011,297/$257 = 15,608.16

2007: $5,675,183/$1,203 = 4,717.52

2008: $5,853,596/$0 = 0

Google once again is the star. Its ratios are off the chart, and in fact as can be seen in the year 2008, they had no interest expense.


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Senator Sessions Attacks Sotomayor

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From The Hoss's Mouth

Like many of you, Money Magazine Hoss sat down this morning to watch the beginning of the historic Senate Supreme Court confirmation hearings for Judge Sonia Sotomayor. I watched the opening statements of Chairman Patrick Leahy (D-Vermont) and Jeff Sessions (R-Alabama) Senate Judiciary Committee ranking Republican member.

Senator Sessions' opening statement was an outright attack on Judge Sotomayor. He stated it is not appropriate for a Supreme Court Judge to have empathy. His implication was that empathy equals prejudice. Sunday on the CBS TV show Face The Nation Sessions said, "When you show empathy toward one party ... you show bias toward another." This man, whose own nomination to the federal bench was rejected because of his well know racial bias, has the gall to attack Judge Sotomayor because she has empathy. Give me a break.

During his nomination hearings, Sessions was questioned about his statements attacking the NAACP as an “un-American” and “Communist-inspired” organization that “forced civil rights down the throats of people.” Those charges are not unlike recent Senator Sessions' statements concerning Judge Sotomayor’s past service on the board of the Puerto Rican Legal Defense and Education Fund (PRLDEF), a group Sessions calls “extreme” because it “brought several race discrimination lawsuits for minorities." Well, it's obvious Senator Sessions has no empathy; sounds more like racism.

In closing his opening statement, Senator Sessions asked the American public who they would rather have on the Supreme Court: a judge who applies the letter of the law or one who uses empathy in making her decisions.

I can tell you this, I would rather have Judge Sotomayor than Senator Sessions.

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AIG Bonus Scandal Continues

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From The Hoss's Mouth

AIG has asked Kenneth Feinberg, the Obama administration's pay czar, to review a scheduled performance bonus payment of $2.4 million to 43 of its top-ranking executives. Money Magazine Hoss clearly recalls the public outrage that occurred in March when $165 million in retention bonuses was paid to top executives.

It is not clear that Feinberg, the person tasked by the Obama administration, with reviewing bonuses and retirement packages for the 100 highest paid executives at AIG, Citigroup, Bank of America, General Motors, GMAC Financial Services, Chrysler, and the defunct Chrysler Financial, has the authority to halt these bonuses. Some believe his mandate is only for current and future payments, not those delayed from 2008 (as these payments are) and therefore not only has no obligation to offer his opinion, but also no authority in the matter.

This would leave the decision up to AIG, and any resulting uproar would be laid squarely where it belongs: in the lap of AIG.

Money Magazine Hoss is of the opinion that if AIG executives would spend as much effort towards making AIG a viable company as they do in obtaining their retention bonuses, the tax payers may then have some hope in recouping the loans they made to AIG.

This smoke screen by AIG will not work. When honest hard working people are losing their jobs and life savings in increasing numbers there is no place for retention bonuses for already high paid executives. If these executives are that great, let them seek employment elsewhere. After all , it is these very same executives who caused the AIG financial catastrophe.

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