Familiarity with the definition
profit in financial analysis;
Surely, while studying the financial analysis of companies with words such as gross profit, profit margin and so on. We have been in touch. But what do they mean?
Will we have a more comprehensive idea of the announced shares by knowing these basics?
We will review the answer to this question at the end of this practical article. Stay with us:
Gross profit:
If we have the income from the total sales of a company for a specific period (for example, 1 year) and deduct the cost of goods and services sold from it, the remainder is called gross profit.
Operating profit:
The gross profit currently shows the difference between the total sales and the cost price, now if from the gross profit the expenses related to sales, operating expenses, business unit including rent and insurance, transportation and rent, salary and depreciation and deduct it, the result will be the operating profit.
Net profit:
Some other expenses, including interest, taxes, as well as all incoming and outgoing funds flows, should be reflected in the operating profit. The result of these changes in the operating profit and the number obtained after calculating the total deductions is called net profit.
What is profit margin?
Simply, if we divide each of the realized profits, including gross, operating or net profit, by the company’s total revenue in that period and multiply the result by 100, the company’s profit margin is obtained in percentage units.
For example, in Hijrat company, with sales of 2250 billion tomans, 70 billion net profit has been realized, as a result, the net profit margin is 3.1.
What does EPS mean?
If we consider the net profit in a period of one year and divide it by the number of shares of the company, it is called EPS (Earning Per Share) or profit per share, which is a common term.
What does DPS mean?
Part or all of the profit realized for each share in a financial year can be distributed to shareholders in cash, which is called DPS (Dividend Per Share).
P/E ratio:
One of the effective and practical ratios in stock analysis is the ratio of share price to profit or income. For example, if the share price is 100 Tomans and the profit per share is 20 Tomans, the P/E ratio will be 5 times. By comparing this ratio in financial groups, you can measure the growth of the share price relative to the income.
Important points:
In defining profit and calculating its margin, each group should be considered independently. For example, the profit margin of a pharmaceutical distribution company cannot be compared with that of a car manufacturing company.
It is not necessary that the entire realized profit is distributed to the shareholders as cash profit or DPS and it may be used for things like accumulated profit.
The P/E ratio alone is not a perfect measure to analyze the value of companies. For many companies that do not have realizable or realized profits and by the way, they are recognizing losses every period, and also in a situation where inflation dominates the valuation of companies. , other methods should be used for measurement.
Mehdi Koh Soltani (financial services, accounting, financial and tax consultant):
Link to the audit accounting clinic
https://telegram.me/joinchat/BnzBsTuioTuSPky30-nUbg