Company Profitability Analysis

Abstract

In this second step of the fundamental company analysis, attention is focused on the company’s profitability measurements. Several tools can be used. The choice is usually based on an analysis perspective and its nature. In this context a financial perspective is followed. The analysis is developed on three main fronts:

• analysis of the economic and financial dynamics over time. The analysis can start from each economic and financial figure. In this context, it can be useful to start the analysis from capital sources and their investment in the company’s activities and to measure their returns in terms of earnings and dividends;

• the analysis of the main financial ratios. There are many well-known ratios in literature. In this context the most commonly used financial ratios used in the financial community are considered. They are able to complete the analysis because they are in line with the analytical schemes regarding Operating and Net Income, Capital Invested and Capital Structure, Free Cash-flow from Operations and Free Cash-flow to Equity;

• the analysis of the growth rate. The fundamental company analysis leads to investigate into the expected consistency of future economic and financial dynamics. Consequently, one of the most relevant key of the analysis is the estimate of the company’s future growth rate with regards mainly to both Net Income and Operating Income.