Profitability ratios are used by investors and analysts to evaluate a company’s ability to generate earnings as compared to its competitors and other industry players. They also highlight the strength and efficiency of a company’s business model. There are two types of profitability ratios; profit margin ratios and rate of return ratios. While profit margin ratios are used to judge the efficiency with which the company earns profits, rate of return ratios provide information of the efficiency with which the company employees its assets and other available resources. Comparison of profitability ratios with other competitors in the same industry reveals the relative strengths or weaknesses of the business. Some of the most commonly used profit margin ratios are Gross Margin ratio, Operating Margin ratio, EBITDA ratio and Net Profit Margin ratio.

Gross Margin ratio:
Gross margin ratio indicates the efficiency of production and pricing strategies applied by a company. In simple terms, it measures the margin left after meeting all the manufacturing expenses including labor, material and other manufacturing costs i.e. the costs which are directly related to the business. Going by this definition it can be assumed that service industry players will normally have higher gross margins as compared to players in manufacturing industries. This is primarily because they have lower manufacturing costs. Moreover, range of gross margin varies across industries. The ratio is calculated as follows:

Gross Margin Ratio = Net Sales – Cost of Goods Sold / Net Sales

Trend of the gross margins over a period of time provides a better meaningful insight into the business strength rather than a single year’s gross margin figure. A company earning a consistently high gross margin over couple of years is in a better position to face the downturn in business cycles. However, a company earning lower but a consistent gross margin over time is considered to be more stable compared to a company boasting higher but a volatile gross margin. Significant fluctuations in the gross margin figure can be a potential sign of fraud or accounting irregularities.

Operating Margin

Operating profit margin measures the profitability of a company’s normal and recurring business activities. It enables the analyst to judge the efficiency of a company’s core business. Since operating profits do not include interest and taxes, this ratio does not indicate the effect of management’s financing decisions and is calculated as follows:

Operating Profit Margin = Gross Profit – Operating expenses / Net Sales

Operating margin is a measure of management’s efficiency. By applying low levels of fixed costs in its cost structure a company can maintain a high level of operating margin. This is important primarily because lower fixed costs grant management more flexibility in determining prices and acts as a measure of safety during tough times. However, it is important to note that nonrecurring and one-time expenses, such as cash paid out in a lawsuit settlement and goodwill write-offs should be excluded while calculating operating margin ratio. They do not represent a company’s true operating performance and can result in misleading conclusions.

EBIDTA margin

EBITDA is Earnings before Interest, Tax, Depreciation and Amortization. Management can manipulate their bottom line by changing the depreciation rates. Moreover, manufacturing companies generally have higher depreciation figure as against service companies. Financing decisions can affect the effective tax rate paid by a company. These factors are a constraint to a meaningful comparative analysis of a company with its competitors and other industry players. Hence, EBITDA margin is a good measure for comparing companies across different industries. It is calculated as follows:

EBITDA Margin= EBITDA / Net Sales

This ratio is useful while comparing companies which carry large amount of fixed assets subject to heavy depreciation charges such as a mining company or an infrastructure company, etc. It is also useful in comparing companies in a mature industry which is in a consolidation phase. Companies in consolidating industry tend to acquire significant tangible and intangible assets, such as a brands and copyrights, which are subject to large amortization charges.

As EBITDA measures the income which is available to pay interest charges, EBITDA margin is of great importance to creditors and financial institutions. Companies with higher EBITDA margins are considered to be less financially risky than companies with low levels of EBITDA margins. In practice, EBITDA margin is used only while analyzing large companies with significant depreciable assets, and for companies with a significant amount of debt financing.

Net Profit Margin

Net profit margin measures the profit available for distribution amongst shareholders (both equity and preference) after meeting all the expenses during the given period of time. It indicates the efficiency of all business activities conducted during the given period, such as production, administration, selling, financing, pricing, and tax management. It is calculated as follows:

Net Profit Margin = Net Profit / Net Sales

Analysis of profit margins along with the study of a company’s cost structure enables the analyst to identify the sources of business efficiency. The analyst should be aware of manipulation techniques used for distorting the income statement before drawing any conclusions based upon the profitability ratios.

by Cashmere Lashkari

As parents we love our children. We give them the best of everything that we can. Even at the risk of spoiling them silly. There is a desire to give the child the best that you can afford. Be it clothes, toys or education. Yet not many parents plan wisely for the financial future of their child.

You are alive and well today, and able to earn money regularly to meet the needs of your children. God forbid if something was to happen to you, what would be the state of your children? Not only will they be devastated that their parent is no more, but they would suffer severe financial hardships as well.

There is no guarantee of life. All of us feel immune to diseases for at least a couple of decades more in our thirties. What we don’t cater for is the unexpected. A healthy 30 year old can be dead in a car accident on the way to work. Don’t think it will happen to you? Why take a chance?

Secure your Child’s Future today!

Here’s a list of things that you can do. Do them all or pick a combination of what works best for you.

Get Life Insurance

While most of us have some sort of group policy at work, it is not enough for the child. It will help in the immediate transition though. So get a separate life insurance policy for your self. This should be payable as a monthly income to the family to help on a regular basis. There are options of paying the premium on a quarterly, annual or monthly basis.

Get Education Policies

Your child is going to need money at various stages in his or her education. At high school, graduation, and post graduation levels. Have separate policies that mature in the specific time frame that you will need the cash. These should be lump sum payments available for admissions and donations. The premiums can be paid monthly, quarterly or annually.

Get Gold

Buying gold was considered the wisest investment in the olden days. Even today it is a sound investment. While investing in physical gold may not be the greatest idea, considering how easily it can be robbed, get into gold funds. These are traded like regular mutual funds on the stock market. A great investment opportunity. Invest as much as you like when you have extra funds around.

Get Mutual Funds

The equity market always gives great returns in the long run. There are crashes when the market suffers, but if you invest in a SIP or Systematic Investment Policy, you will be immune to the daily ups and downs of the stock market. To safe guard your investments even more, invest in mutual funds that have performed well over the last five years and tend to invest in blue chip companies. Invest a fixed amount every month.

Get a PPF

A Public Provident Fund in the name of the child is a great idea to save money. You need to invest a bare minimum on a yearly basis, and when you have extra money you can park it there. The temptation to spend must be avoided at all costs. Even if it is something luxurious for the child. Earmark it as education money. Invest a fixed amount every year.

These are a few basic steps that you can take to ensure that your child always has a financially secure future.

To have your blog posts written by an experienced blogger contact me at cashlash@yahoo.com
Visit my personal blog at http://www.cashmerelashkari.com

Beginners in investing should begin with some basic objectives and to fully understand them before putting in your first investing portfolio. The followings are some key pointers to guide beginners.

A] Income generation objectives

This is more concern about current income then capital appreciation overtime. Trading is an aspect to income generation where the time horizon is much shorter.

B] Growth objectives

Investors are concern about capital appreciation and ready to take on a longer term objective. An example will be today market situation is a good time to take on equities or funds position as extreme price bargain is available now.

C] Capital Preservation objectives

It is a concern on the risk involved especially when one reached near to retirement age. There is a need to diversify their portfolio into allocation of stocks, bonds and cash to minimize the risk. If one is near retirement age, he should not allocate more then 25% of his total funds on equities.

D] There are various types of investment instruments.

They are savings accounts, fixed deposit, Bonds, Stocks, Commodities, Mutual Funds, Derivatives like Options, Contract for Differences and Real Estate.

The common factors that investors need to consider in choosing the various instruments are as follows:

1] Time horizon of the investment.
2] Risk tolerance and management.
3] Rate of return or yield.
4] Diversification to spread the risk.
5] Taxation concern.
6] The size of investment units. Some stocks can only be purchase with a minimum of 1000 shares per lot in certain countries.
7] The liquidity and marketability of the stocks concern.
8] The security of the principle sum invested and the needed income that one would expect.

Investor mistakes happen and the big ones can kill you financially. If you lose half of your money, you need to double what you have left to get back to break even. Here we discuss the major investor mistakes, not the obvious.

Call the following rules investing basics, or simply investor mistakes to avoid. The sorry thing about these investor mistakes is that some financial planners I have known not only embrace them, but they use them as sales tools, so beware.

Never play “catch up”. For example, your financial planner reviews your progress and finds that you are not on track to reach your retirement goals. Even though you are a relatively conservative investor he recommends investing heavily in aggressive stock funds to earn a higher return. The stock market tanks, and your dreams of early retirement go down the drain. This course of action goes against sound investing basics. Unfortunately, in 2008 and early 2009 too many investors made this major investor mistake.

Averaging down on a stock is an investor mistake, and an old sales tool used by some stock brokers to work a client for commissions. Your broker calls and suggests buying stock in XYZ Financial at $10 per share. XYZ sold for over $40 less than a year ago. You buy 1000 shares and the broker makes a commission. Two months later he calls back when XYZ is selling for $5. The broker exclaims that if XYZ was a good buy at $10 it’s a great buy at $5. You buy 2000 more shares, and he makes a commission.

When XYZ hits $2 your man pimps you again, because at $2 XYZ is the opportunity of a lifetime. You buy 5000 more shares, he makes yet another commission and soon after XYZ goes broke. You lose every penny you had invested. You made a major investor mistake and violated one of the rules of investing basics. If XYZ was a good buy at $10 and $5, why did it then go to $2, and end up broke?

Do not believe that higher interest rates are good for investors. Savers may benefit, but investor mistakes in times of rising interest rates can be costly. Bonds and bond funds will fall in value, and often times stocks and stock funds as well.

Do not believe that you have nothing to worry about if your investment portfolio is diversified. You are diversified if you own several stock funds, but in a bad stock market they will likely all be losers. For much of 2008-2009 there was virtually no good place for average investors to invest and make good returns. Investors lost lots of money, diversified or not, even if they understood investing basics.

Paying ongoing fees for service, or for timing services, is often an investor mistake. For example, you roll your $200,000 retirement plan into an IRA through a financial professional. He puts you into various mutual funds from various fund families. In addition to sales charges of almost 5% and yearly fund expense of over 1%, you are also charged a yearly service fee of 1 1/2%. That amounts to $3000 the first year and grows with the value of your account. Be careful what you sign, these extra fees are not necessary.

In regard to paying for timing services, this is almost always an investor mistake. Very few market timing services have a good long-term record for timing the stock market.

The last of our investor mistakes to avoid: don’t complicate your life by getting disorganized. You may have had numerous employers and retirement plans. Now you have your money scattered about and have lost control. Consolidate by rolling these retirement funds into an IRA with one or two major mutual fund families. You will be able to access your accounts and get service no matter where you live.

Conquer the Art of the Back Test and Stop Trading in the Dark

Your persistent savings will add up with time.  One hundred dollars saved each year will cause your total savings to rise from $100 to $1,000 in ten years.  However, your net worth (or financial wealth) should grow, over time, by much more than the sum of your savings.  This is because of the power of compound interest.  This means that you should expect to receive on your savings some rate of interest (or return or appreciation) each year.  If you leave the interest in your account, your interest will “compound” because you will then receive in subsequent years interest on your savings, plus interest on the interest that you received in previous years.

Again, if you save $100 for ten years and receive an interest rate of 10 percent, your total savings with interest will grow from $100 the beginning of the first year to $210 the second year ($100 of savings the first year plus $10 of interest on the first year’s savings plus $100 of new savings), to $331 the beginning of the third year, on to $1,594 the beginning of the tenth year.  In short, with compound interest you will have close to 60 percent more in net worth at the beginning of the tenth year than you would have had from the savings alone.

You can imagine with “interest on interest”—or compounded interest—your net worth will build progressively more rapidly with each passing year.  With sufficient savings, enough patience, and a reasonable rate of interest on your savings (or return on your investments),  you can imagine that your net worth (and resulting income level) in the future will be the envy of those who have chosen to spend all their income year after year on many things they could do without, or do with less of.

To dramatically illustrate just how powerful compound interest can be in building wealth, suppose that you are a newly minted twenty-two-year- old college graduate, with a starting salary of, say, $30,000 a year, and you salt away a mere $2,000 the first year, and only the first year, on your job (which means that you will then save only 6.6 percent of your annual pre- tax income that one year).

Assume that you are able to secure an annual rate of return on the investment (above the inflation rate) of 15 percent until retirement.  Amazingly, your onetime investment will be worth, in the purchasing power of today’s dollars, $814,774 at age sixty-five and over $1.64 million at age seventy.

Why Torture Yourself Listing All Your Bills? You need this information in black and white to get a realistic picture of where you are.  This info will also help you later when it’s time to negotiate with creditors or collection agencies.  Again, write down everything that you owe, even including credit cards that might have only $100 on them.  Don’t make the mistake of leaving those “small” bills out because “Oh, I’m going to pay that one off this month anyway.”  Just write down everything you actually owe as of today.

Many people have a rough idea about how much they owe their creditors.  But there’s no substitute for having true, accurate numbers – not guesstimates.  To fill in the proper figures on your written sheet, or your computer spreadsheet, you’ll have to go find your most recent statements and invoices from your creditors.  Take as much time as you need today to collect all this data.  It’s a crucial step in you getting your finances together.

It’s also a good idea to call the companies you owe and ask for the latest information about your debt, especially if you’re looking at statements that are more than a month old.  Even if the statements are current, you should call your creditors because some of the information on those statements may have changed.  For instance, you may have charged additional items since the closing date on your credit card statement, so now your debt is actually greater than your current statement indicates.  Also, you may have had a teaser rate or a lower interest rate in the past, and maybe that interest rate has now jumped.  Whatever the case, you need to have the most accurate information that is currently available.

A Wake-Up Call: How Much Do You Owe?  The next step is for you to add up all your debts.  For some of you, seeing your total debt in black and white may be a scary thing: a wake up call to how deeply you are in financial bondage.  For others, seeing your total debt may offer relief: perhaps you don’t owe as much as you feared.  Whatever the situation, don’t panic.  Remember, you’re on the path to financial freedom now and if your goal is to get to “Zero Debt” status, keep plugging along – it will happen, and sooner than you think!

Many people think of the stock market, real estate and mutual funds when considering investing, but there are many other forms of investments that can be made. The article below, written by James, discusses some of the more unusual types of investments that are available.

There are many choices to be made when looking for investment options. Let’s look at some of the more unusual ones.

Art Investment.

Art work, be it sculptures or paintings have an investment value. The buyer must do research into the work and look for quality and significance. These two factors are the main contributors to artwork that can appreciate in value. Investors should consult with art dealers and valuations must be undertaken by reputable firms before purchase. This type of investment is usually for the longer term and can be rewarding.

Antique Investments

Antiques are investments which already have a value because of there age and significance. The valuation becomes the critical point in deciding the purchase price. Some are over valued and the profit is already factored into sale price. The time that they are held by the investor will determine the appreciated value. Some antiques are to be found in dealer shops whilst others can be located at clearing sales, auctions and garage sales. It is important to have a historical knowledge of the antique before purchase as this often helps in deciding its resale price.

Motor Vehicles

Older motor vehicles are now becoming collector items and can appreciate because of their scarcity and uniqueness. Restoration is often a major part of the valuation and can cost a lot of money. Parts and labour input involved often mean the investor has to allow for ongoing costs until the restoration is complete. The rewards can often be double the initial investment cost.

Sports Memorabilia

As sports heroes come and go, some are remember forever for their greatness. Investing in memorabilia that covers their feats can be rewarding. Items such as frames sports clothes, bats and balls used by the hero and signatures all retain value to the collectors and the sports fanatics. These trophies can increase in value with time and can be a good investment for the wise. Know your sports history and invest with confidence.

Basically, any item that can increase in value with the passage of time can be looked at as an investment. Some of the more unusual items have the most resale value and appreciate the quickest. Always be on the lookout for such items and try to increase your knowledge about them as you look. By joining clubs and participating in hobby activities you will often learn more about such items than you will from a book.

There are lots of options within this category of unusual investments and we have only covered a few basic ones here. Investments principles are not just limited to property and shares but can be applied to anything that has value. Appreciation of those items that make investments means research and lots of foot work to gain an advantage on other investors. For more information on investment options go to http://www.investmentoptions.freedvd.com.au. Good luck with your search.

Some link the origin of Bear and Bull to a book written in the 1700’s called Every Man His Own Broker by Thomas Mortimer. The book describes the tendencies of some investors and links them to bears and bulls. The bull, as described in the book, was someone who might purchase huge amounts of stock with little or no money at all and hope to sell the stock for a profit before the time to pay for it came due.

A bear, on the other hand, sold stock or property that he didn’t even own yet, and then would be forced to scramble to find a way to obtain the goods before he was due to deliver it.

There are some interpretations of the phrases which are much more logical. When a bull attacks, he will use his horns and swipe up to cause damage, while a bear will attack you with his paws and swipe downward.

There is also a group that believes the use of the terms dates back to bear trappers and the practice of bear skin salesmen selling skins they didn’t have yet at a particular price, hoping the skinners would come to sell their kill for a lower price, so that the salesmen could take home the difference. And since a one-time staging of bull and bear fights was popular, the term bull was given to anyone who didn’t practice this.

One final possible origin is related to the ways the animals charge, with bulls moving at high speed forward and bears moving slowing and cautiously.

While the origins of the bear and bull market may never be known, the stories surrounding them are just as colourful and fun as the terms themselves.

I don’t know if any of you know the old blues song from the 1930′s that goes “Once I lived the life of a millionaire…spending my money…I didn’t care. Taking my friends out for a mighty good time…buying bootleg liquor, champagne and wine. But then ooh…I fell so low…Had no friends and had no place to go…”

Today, it is as if the same song is being sung by the U.S. dollar. The U.S. dollar is being deserted one friend after another. One would expect the dollar to rally after its big decline, but it doesn’t. WHY?

More and more countries that have aligned their currencies to the U.S. dollar are re-examining the so called U.S. dollar peg.

China is being forced to do so by European and U.S. pressure. Hong Kong speculators are attacking the Hong Kong dollar peg to the U.S. dollar and forcing the Hong Kong government to defend it at great expense.

The six Middle East countries pegged to the U.S. dollar (Saudi Arabia, Kuwait, UAE, Bahrain, Oman and Qatar) that export a lot of oil and have historically tied their currencies to the U.S. dollar. This group has decided to institute a single currency by 2010.

Many other oil exporting nations have been interested in being paid Euros for their energy.

The new rich nations of the world that sell raw materials, or manufactured goods, are all wondering about the big buildup in dollars in their portfolios, and what they will do to diversify their risk. In addition to causing a decline in the value of their holdings, having too many dollars causes other problems.

When-non dollar nations accumulate large quantities of U.S. dollars, they must sterilize them to avert inflation (this is often done by buying U.S. dollar denominated debt). If the dollars are used to buy goods, it can end up importing inflation (especially if they buy goods from non dollar based countries that are rising in price).

Although the dollar can rally at any time, until the U.S. starts to face its fiscal and trade deficit problems, and the U.S. economy finds a bottom to the credit crisis…the currency will remain ‘Under Pressure’…(a popular 80′s pop song for those readers who may not be familiar with 1930′s blues tunes).

CHINA AND SOME OTHER SOVEREIGN WEALTH FUNDS ARE RAMPING UP THEIR STRATEGIC INVESTING IN METALS, ENERGY AND COMPANIES

Their focus is on acquiring mineral resources, energy resources and investments in private equity houses, where they can get big and cheap stakes in companies.

Today, it was announced that China is seeking to make major investments in a large number of private equity firms. This is logical, and it follows the pattern that they have set in the last few years. They have been accumulating MINERAL AND ENERGY assets in Africa and Latin America.

They do not mind investing in countries with corrupt governments or wars going on. They are more than happy to invest in stable African and Latin American countries like Tanzania, Kenya, Uganda, Brazil, Peru and others to secure raw materials. They are after nickel, coal, zinc, copper, iron ore, oil and precious metals.

Political risk is not their big concern. Their big concern is to get the raw materials to allow 300 million more Chinese (in the case of China), and countless more in other countries make the transition from countryside subsistence farming to urban dwelling and its blue and white collar jobs.

No wonder precious metals, base metals and energy continue to rise…the demand continues to grow. We estimate that there will be continued demand for years to come.

BETTER LATE THAN NEVER

The IEA (International Energy Agency) hints that its new crude oil forecast (to be announced soon) will be much higher than the previous price forecasts have been. Failing to buy the peak oil thesis for a long time, the IEA has been making low-ball estimates of global energy prices for the whole five years we have been shouting about higher oil prices. This was because they believed what the oil producing countries told them. Of course, the oil producing countries had a vested interest in trying to sell the world that they could increase production and keep oil prices down so consumption would stay high.

Now even the IEA has seen through this paper thin argument, and will announce that oil prices can go much higher because the amount of oil which can be produced in the world has PEAKED.

OUR THEMES

We remain gratified that our themes have worked out so well, and we continue to see most of them working in future months.

Energy-We are certain that energy which we predicted years ago could go to $100 by 2008 will get there soon. What then? At this juncture we believe that alternative energy and foreign energy companies may be more attractive than U.S. energy providers. We have investments in energy companies operating in Australia, Canada, India, Africa, the North Sea, Norway, South America and the Mid East. We continue to own oil, natural gas, uranium and renewable energy investments in the energy sector.

Base Metals-Although we remain bullish on base metals long term, for the short term we are concerned that a weak U.S. economy will cause base metals stocks to move sideways. We will not emphasize base metals stocks for the next few months for this reason.

Precious Metals and Currencies-The weakness in the U.S. dollar mentioned above is extremely salutary for gold and non U.S. currencies, and we remain very positive on them for the coming months. We own both gold royalty companies and the metal itself. We own several non-U.S. currencies, including the Canadian Dollar, British Pound, among others.

India-India has recently changed the investment regime for foreign investors. This may cause a short-term decline in Indian stocks, which we would be delighted to see. We believe that India holds huge promise over the long-term and we would like a lower price at which to add to our Indian positions.

China-China is best played through Hong Kong, and this has been a very successful area for us. We will use any market corrections (which usually appear at least once a year) to add to our Hong Kong based positions in Chinese companies.

Singapore and other fast growing countries-Here again we plan to wait and add on market corrections.

We look forward to your comments and we thank you for listening.

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These articles are for informational purposes only and are not intended to be a solicitation, offering or recommendation of any security. Guild Investment Management does not represent that the securities, products, or services discussed in this web site are suitable or appropriate for all investors. Any market analysis constitutes an opinion that may not be correct. Readers must make their own independent investment decisions.

The information in this article is not intended for distribution to, or use by, any person or entity in any jurisdiction or country where such distribution or use would be contrary to law or regulation, or which would subject Guild Investment Management to any registration requirement within such jurisdiction or country.

Any opinions expressed herein, are subject to change without notice. In addition, there are many market, currency, economic, political, business, technological and other risks that are beyond our control. We make reasonable efforts to provide accurate content in these articles; however, some content and some of the assumptions, formulas, algorithms and other data that impact the content may be inaccurate, outdated, or otherwise inappropriate. In addition, we may have conflicts of interest with respect to any investments mentioned. Our principals and our clients may hold positions in investments mentioned on the site or we may take positions contrary to investments mentioned.

Guild’s current and past market commentaries are protected by copyright. Apart from any use permitted under the Copyright Act, you must not copy, frame, modify, transmit or distribute the market commentaries, without seeking the prior consent of Guild.

About the author:

Mr. Guild founded Guild in 1971. Prior to founding the company he was an analyst at a bank and a hedge fund. Mr. Guild is a recognized expert in the areas of international investing and economics. He has been a writer and speaker on economic issues for 30 plus years and has been widely quoted in the world media. He holds a BA in economics and an MBA with highest honors. For more company information please visit http://www.guildinvestment.com

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