Analysis of Total sales in Income Statement
Key Numbers of Income Statements
Every stock market participant would know how Financial results could impact on the stock prices. However, what things have changed price dramatically and why? I have given some important income statement items which are noticed by investors and Financial institutions.
Earning Before income tax Depreciation and Amortization (EBITDA)
Operating Profit (EBIT)
Earning after Tax (EAT)
As a given item comes from the Income statement, yet some items are analyzed from the Balance sheet and cash flow statement. In this Article we only discuss the Income statement Item.
Total sales
Anyone business - the sales volume and Total sale will be backbone to Business operation. Increasing the sales over time means that the company has got better demand in the Market for their products.
Increasing the sales would lead to improved operating profits as well as Net profits.
Decreasing the sales might be a warning sign to investors or sometimes it may occur due to a worse business environment. For Example, the Indian Real estate sectors have been met with the worst business environment since 2010. Therefore which sectors could increase their sales volume and Net profit.
This company is one of the leading Public sector companies which manufacture Jet flight for the Indian Air Force. Its sales number will vary from time to time - up to booking new orders.
So, the company’s fixed costs are constant; those will affect operating margin when the company's sales drop. If the company's sales increase that could improve operating margin and Equity earnings.
That is called Operating Leverage.
Operating Leverage
Operating expenditure comes under two categories that are Fixed costs and Variable costs. The business entity must have to spend money for business cooperation Such as Rent, D&A, and Administrative. The business is having low operating leverage - the investors will get higher return when company increase its sales volume,
The high operating leverage company’s sales volume and amount of sale are very important in order to calculate return on Equity. On the other hand, Low operating leverage companies can provide better returns to investors by small amounts of sales number improvement.
For example, IT companies are having low operating leverage which typically grow at 2-3 percent even though the investors will get 15- 20 percent return through those stocks.
As Equity investors and Traders do not use the single measurement to all kinds of stock. sales volume is essential to High leverage companies, Operating margin is very important to Lower operating leverage companies.
Capacity utilization
Generally, commodity based industries such as Oil, Metal and Chemicals are having high fixed costs. Typically, those industries would outperform during the economic peak.
During the economic peak stocks prices will go up at non-stop thus those companies would utilize full capacity and keep lower its manufacturing costs.
During the economic slowdown companies can not meet their operating expenditure while profit may drop or make a loss.
So, the capacity utilization is a good indicator to measure its future return and stock price trend when commodity based industries operate with full capacity while investors are able to get higher return during the lower capacity utilization which will be unable to meet the operating expenditures- following that stock prices will drop.
How to analyze sales growth?
I already mentioned that the sales number will be scrutinized by Equity analysts. However, some companies' results create surprise amongst the investors because that could improve EPS growth dramatically. The reasons are:
Involving in scalable Business
Lucrative operating margin
Pricing power.
Scalable business
Some businesses can expand their business without investment or provide service to more customers through existing resources. For example Titan, which Franchise based business can expand pan India, insurance companies can increase the customers through existing resources because they could do the process by Online.
Like this, scalable businesses have enormous growth opportunities, perhaps these companies are unable to retain their growth rate as soon as the stock price falls more quickly.
Lucrative operating Margin
The Equity must sort out Business characters in order to know market reaction after coming out with a Financial result. Here I give below shortly.
Scalable business - the market will expect High sales growth, if not meet market expectation the market will punish mercilessly.
High operating leverage Business - usually commodity based comes under these categories, sales number and sales volume price are key to gauge investors return. Falling the product price is a red flag - investors might exit from this stock because Lower cost of volume will reduce operating profit.
Low operating leverage Business - like these category stocks will not be affected much by low sales growth.that’s why like these not affected by moderate results.
Pricing power - Monopoly or Oligopoly companies have got competitive advantage than other competitors. Customers would not shift to the low cost product and who are willing to pay high price even if the company is selling at a high price. The reason is that the company gained trust amongst the customers.
For example, ITC, Nestle, and Havells
Sales number is not a solo tools to analyze the stock. Although, it helps to identify whether a particular stock is deserved to buy at certain situation.
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