The results of a company for a period show how did the company performed, and whether it registered profits or losses.
Contrary to the financial statements, which reflect the company’s picture for an specific moment, the results expose the company’s performance during na entire period, showing how costs and revenues are doing and whether they are leading to earnings or not. The results’ main accounts include revenues, cost of goods sold and general expenses during a period, which is usually issued by companies each quarter and end of year.
We’ll be describing all accounts that compose a company’s report, analyzing its importance when looking for a company’s situation and profitability, or through its competitive advantages, margins and promising projects and operations, or is experiencing financial or economic difficulties, among others. Below, a report issued by Arezzo S.A (brazilian report):
The operational revenues represent the company’s total or gross revenues, from normal and usual activities. Basically it stands for the volume of products or services sold during a determined period of time. For example, if a company sells computers, all revenues from computers sold compose the operational revenues. However, if a company divests or sells assets, like a piece of land, that is not account as operational revenues.
The operating revenues represents only the gross sales of the company. Sales pricing can change during a period, due to a number of reasons, like inflation rates, volumes sold, supply and demand, way of payment, adjustments by the company, etc. Huge revenues do not necessarily means profits, or a good healthy company. All expenses must be deducted to find whether a company is making money or not. When we exclude all costs and expenses, then we have the net revenues, the first item to analyze a company’s health. The less it spend, the better will be the net profit.
All sales cancelled or product returns by customers, either because they didn’t meet the clients’ expectations or for malfunction reasons or any other reason which the product has returned to the hands of the company, where it didn’t received any profit.
All discounts granted to customers motivated by problems or malfunctions on products and services.
All taxes incident on products and services, like IPI, ICMS and ISS in Brazil. The income tax is not considered at this point, because it just applies over profits after all costs and expenses are considered and calculated.
Operational net revenues
Operational net revenues are the sales revenues minus cancelled sales, discounts and sales taxes. This account represent the turnover able to cover company’s costs and expenses.
Cost of Goods Sold
The cost of goods sold unite all costs for producing an item, since raw materials, direct workforce and indirect manufacturing costs until any other necessary cost for keeping the products at the markets. For retails companies, the capital spent on products purchased from industries to be resold are written down in this account. For service providers, all costs for keeping the company doing the respective service are considered. However, many service providers take cost of goods sold as operational costs, without make any distinction between the costs for getting the products and those proper operational costs.
In case of an industrial company and also retailers, a good way of calculating the cost of goods sold is to take the cost of the inventories in the beginning of the year. After that, it’s just adding costs for increasing inventories along the year and by the end of the period, exclude the value of the remaining stocks.
The gross profits are equal to the operational net revenues minus the cost of goods sold, and basically informs how much a company earned from total revenues after paying for workforce and raw materials. From that, we can find the gross profit margin by dividing the gross profits by the total revenues.
A company with great competitive advantages usually register high gross profit margins. For such, the company needs to keep its pricing reasonably above the sales costs and expenses. However, companies with low competitiveness cannot do it easily. As a general rule, groups with gross profit margins of 40% or more use to have a sustainable competitive advantage, but there is some exceptions for that. Some companies operate with lower gross profit margins, but have really small general expenses, so they can sustain high net profit margins. Likewise, other companies have high gross profit margins, but huge administrative and general expenses, R&D costs or interest on debts, which may destroy margins and head to poor net profit margins, destroying their favorable health conditions.
All of those expenses required to maintain the company’s activities, such as sales and administrative expenses, those for selling products, R&D costs, depreciation and amortization and other underlying costs that the company might have that belongs to its operations
Sales, general and administrative expenses
Correspond to those costs necessary for the company’s commercial activities, like commissions paid, marketing and advertisement, rents, wages, legal expenses, office materials, travel costs and other necessary expenses. The lower they can be, the better for the company. This is due to the fact that if for some reason the company has a lower income, either by reducing the price of the product or by falling sales, its operating income will decrease, however, general and administrative expenses remain the same, resulting in a shrinking net income.
Other operational costs and expenses
In this account, all other costs and expenses not related to the sales and administrative areas must be described.
This account lists all expenses or revenues from equity stakes the company has in other companies. If a company has a stake in another and meets the conditions for accounting for investments by the equity method, the investor company will recognize in its income statement a portion of the profit or loss of the company in which it owns participation.
The operational profits is the gross profits minus all operational expenses and equity equivalence.
The non-operational revenues is the profits obtained from eventual transactions, which are not part of the company’s operational activities and are not usual to happen. For instance, if a company which sells beverages makes some cash by selling a piece of land, or any other permanent asset, that results in a non operational revenue, as the land is not part of the company’s activities, although it generated an eventual income.
Just as non-operational revenues, the non-operating expenses are those expenses not related to the company’s usual activities. Eventually, a company may register losses from selling or leasing assets, or even some damages caused by natural disasters which are not covered by insurance policies.
Profits before financial results
The profits before financial results corresponds to the operational profits minus all non-operational revenues/expenses.
If a company gets loans, it needs to be paying interests for some time yet. Even though a company might be receiving more interests than paying them, most of them, especially those which need a strong cash flow to sustain their output, usually pay more interests than receive them. Such interests are labelled as financial costs, not operational, as they are not related to any productive or commercial activity. The larger the debts are, the more expensive the interests shall be.
Many times, even if a company has high financial expenses, the proper costs for keeping them up is actually low. However, it is much better for a company to have little or no interest expense, thereby obtaining a competitive advantage over other companies. Remind that discounts granted by companies to their clients are also treated as financial expenses. The investor needs to be aware of the indebtedness level of a company, and how much it pays on interests in proportion to its operational profits. Investment banks, for example, spend about 70% of their operational profits to honor interests.
Eventually, depending on the company’s sector, it can generate finacial revenues. If a company has a high cash, and invest their funds in the financial market, it will get interest income.. Besides, discounts the company can negotiate with suppliers are also accounted as financial revenues.
Profits before taxes and equity
It comprises the profits before adding or subtracting all taxes, equity or any other financial expenses or revenues. Thus, it is the profits after all costs and expenses, except for taxes incident on profits, such as the income taxes.
Income tax, “social contribution” and equity
Represents the taxable income of the company. Every business and every taxpayer have to pay taxes on their income. This release reflects the true profit of the company. In Brazil, the standard taxation on profits reach 15% in average.
The net profits indicate the period’s results after deducting all expenses and charges. This account provides the exact cash the company retained after paying the last taxes. It also represents how much money from revenues shareholders and partner are actually earning. Part of those profits can be shared as dividends or even re-invested at the company.
Net profits for an isolated period do not say much about a company. The right thing to do is to analyze the historical data for the company’s profits, because it may have a long history of losses, and only one particular year of profits. To find out if the company has a net income with competitive advantage, simply review the previous years. If the company has a history of 20% of margins over sales, that means it has a solid history and competitiveness over time, and probably for the long term as well. However, if margins are below 10%, it is possibly having troubles while facing the competition, or facing financial problems. However, there are exceptions. Banks and investment groups usually have a high net operating income, but a low net income. But that does not mean that it presents financial problems.
Profits per share
It’s basically the net profits of a company divided by the total number of shares. The more a company earns per share, the higher will be its stock prices. Such number, when analyzed for a period of 10 years, indicates a lot about a company, giving a full picture about the years to come and how the company will be doing. The more the company provide constancy and an uptrend in earnings per share, the better the company to invest. Soon, a steady income means that the company is selling and earning enough to allow it to make necessary expenses in order to increase its market share through advertising and expansion, or else it uses financial engineering tools, such as buyback shares, for example.
We can summarize the financial results for a period as follows (brazilian example):