Working Capital Per Dollar of Sales

From The Hoss's Mouth

Working Capital Per Dollar of Sales is another financial calculation investors use when analyzing the performance of a company. This calculation tells the potential investor the approximate working capital a company should have.

Simply put, working capital is Current Assets minus Current Liabilities. Working capital per dollar of sales is the Working Capital divided by Total Sales and is expressed as a percentage.

Working Capital Per Dollar of Sales = (Current assets - Current liabilities)/Total Sales.

Current assets and liabilities can be found on a company's Balance Sheet, and total sales is found on a company's Income Statement.

The trick for investors is recognizing the fact that working capital per dollar of sales varies across industry types.

For example, retailing businesses with substantial low cost sales require a working capital per dollar of sales of about 10 to 15 %, while industrial manufactures who produce high cost merchandise require 25 to 30%. Companies such as fast food chains, due to the cash nature of their business, often operate with a negative working capital per dollar of sales.

Smart investors, when analyzing prospective companies, are always cognizant of the fact that the character of the business plays a huge part in determining the amount of working capital per dollar of sales a business requires.

Money Magazine Hoss hopes you will find this information useful.

Stay on Track,

Money Magazine Hoss

Next Hoss Cents Free Financial Money Magazine Post: August 30, 2009
Return to previous post from Working Capital Per Dollar Of Sales
Related Posts:
Calculating return on assets (roa)
Calculating Asset Turnover
Calculating Return On Equity
Financial Statements Explained
The Balance Sheet
The Income Statement
Calculating Gross profit Margin
Calculating Operating Margin
Investment Strategy Dollar Cost Averaging
Market Timing
Calculating Net Profit Margin

Calculating Gross Profit Margin Percentage

From The Hoss's Mouth

In today's post, Money Magazine Hoss takes a look at calculating gross profit margin percentage. He will compare the income statements of three companies: General Motors, Amazon and Google. In particular, we will concentrate on the total revenue and gross profit for the years 2006, 2007 and 2008, from which we can calculate the gross profit margin (GPM) for each company for each year.

Why is this number important? Generally speaking, high gross profit margins are considered to be the signs of efficient companies which tend to make decent profits. Investors favor this type of company and are usually willing to pay a higher price per share. This will be clearly demonstrated in our three examples.

Calculating Gross Profit Percentage is not difficult; it is simply Gross Profit divided by Total Revenue.

Let's take a look at the first at the first company Money Magazine Hoss has illustrated for you, Amazon:



Amazon 2006 GPM = 245,600/10,711,000 * 100 = 22.9%
Amazon 2007 GPM = 3,353,000/14,835,000 * 100 = 22.6%
Amazon 2008 GPM = 4,270,000/19,166,000 * 100 = 22.3%

Amazon's GPM has remained constant for the three year period at about 22.5%. A good figure.

Next, Money Magazine Hoss has prepared the GPM for General Motors for the same time frame:



General Motors 2006 GPM = 4,267,000/207,349,000 * 100 = 20%
General Motors 2007 GPM = 12,121,000/181,122,000 * 100 = 6.7%
General Motors 2008 GPM = -1,624,000/148,979,000 * 100 = -11%%

General Motors GPM has been a disaster. Over a three year period it has declined from 20% to a negative figure. Not a company Money Magazine Hoss would invest in.

The third and final company that Money Magazine Hoss selected for the sample three-year period is Google. Take a look:




Google 2006 GPM = 6,379,890/10,604,917 * 100 = 60%
Google 2007 GPM = 9,944,901/16,593,986 * 100 = 60%
Google 2008 GPM = 13,174,044/21,795,550 * 100 = 60%

Google's GPM has remained constant at a very high 60%, which is an excellent Gross Profit Margin.

It is obvious to all that if Gross Profit Margin Percentage was the only criteria an investor was to use in selecting a company to invest in, Google would be the choice. However, as mentioned in Money Magazine Hoss's previous post The Income Statement there are several other criteria which must be taken into consideration. We will be reviewing several of these in future postings.

The June 24, 2009 closing stock prices of Google $409.29, Amazon $79.27 and General Motors $1.11 should not come as any surprise based on their respective Gross Profit Margins. These closing stock prices confirm our statement above: that investors pay higher prices for companies with high Gross Profit Margins.

Stay on track,

The Hoss

Next Hoss Cents Free Financial Money Magazine Post: Operating Margin
Return to previous post from Calculating Gross Profit Margin Percentage

The Income Statement

From the Hoss's mouth

The Income Statement was formally known as the Profit and Loss Statement. Why? Because it shows all of a company's revenues and expenses for a certain period of time, and details any profit or loss.

The prudent investor will review this document in combination with the company's Balance Sheet and Cash Flow Statement when making a decision whether or not to invest in a company.

The following income statement is from Amazon and shows the years 2006, 2007 and 2008.

There are many formulas, ratios and calculations a prudent investor can apply from the information contained in a company's Income Statement. These formulas help the investor determine if a company would be a good investment.

Gross Margin, Net Profit Margin and Return on Equity are just a few. But before explaining these calculations (which The Hoss will do in a later post) one must first understand the details of the Income Statement itself.

The first line of any Income Statement shows the Total Revenue from all sales for the reporting period. (aka the Top Line).

Next we have the Cost of Revenue, which shows the total the company paid to obtain or manufacture the products it sold (aka Cost of Goods Sold or COGS).

The Gross Profit (income) follows and is calculated by subtracting the COGS from the Total Revenue. The greater the Gross Profit, the more likely a company is to have a positive bottom line. This is very clear in our Amazon example, as each year shows a significant increase in the Gross Profit and the Net Income.

Operating Expense is next and it shows...yes, you guessed it, the company's operating expenses. Investors calculate the percentage of expenses to sales to evaluate management efficiency in controlling expenses.

Now we have the Operating Income, which is a measurement of a company's earnings from its own operations. It does not include income from non-operating sources such as interest income.

Gross Profit minus Operating Expenses= Operating Income

The next line on the Income Statement is Income from Continuing Operations. This details the income (if any) that a company generates from non-operating sources such as interest from bank deposits. It is often expressed as a net (income-expenses) as is done in our Amazon example.

Now we find the line Earnings Before Income and Tax (EBIT), which simply is the total of Operating Income plus income from other sources. From this we deduct the next line entry which is Interest Expense (interest payments paid on company debt).

This gives us the next entry, which is Income Before Tax. In our Amazon Income Statement example the figure is $901,000,000. This is the profit Amazon made before paying any taxes.

Income Tax Expense is the line entry that shows the total income taxes the company paid to all government agencies. The income tax expense figure is deducted from the line income before tax to give the company's Net Income from Continuous Operations. Please Note: this is Net Income not Net Profit.

The Net Profit is the money left after any Specialty Items or Extraordinary Expenses are deducted from Net Income from Continuous Operations. What are specialty items or extraordinary expenses? They are called write offs and are supposed to be on- time occasions. Our Amazon example Income Statement provides lines for these expenses, but no actual charges were made in the three years reported.

The Net Income is (aka net profit or net earnings or bottom line) is the total funds available to preferred and/or common stock shareholders.

That pretty much sums up the information in the Income Statement.

The Hoss hopes you have found this explanation of a company's Income Statement beneficial for your investment activities.

In his next post, the Host will give a quick Income Statement summary and will provide information regarding formulas, calculations and ratios investors use for Income Statement analysis.


Stay on track,

The Hoss

Next Hoss Cents Free Financial Money Magazine Post: Gross Profit Margin
Return to previous post from The Income Statement