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Operating Profit Margin



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The next topic is *Operating Profit* and *Operating Profit Margin*

  • Operating Profit* is also called EBITDA in accounting terms. Ppl from commerce will be familiar with it.
  • Operating Profit* is the

amount of money the company makes

after subtracting the operational expenses of the company

from its operating revenue

So, Operating Profit = Operating Revenue - Operating Expenses

First lets find out *Operating Profit* with an example

Let us take the example of REC

http://www.screener.in/company/RECLTD/

Look at Operating Profit of REC Ltd under the Annual Results section.

Mar 2013: 13,247.76

Mar 2014: 16,567.49

Mar 2015: 19,274.77

Mar 2016: 22,329.39

Those are profit numbers. Consistent profit making company.

Consistency in company performance is a quality parameter.

Now, in screener, if u scroll down a bit, you will observe: *Compounded Profit Growth*

Compounded Profit Growth:

10 Years: 26.88% 5 Years: 16.97% 3 Years: 13.81% TTM: 2.09%

Here, TTM means: Trailing Twelve Months

i.e in the last 12 months. i.e, say Aug 2015 to Aug 2016

Not financial year 12 months.

Now lets focus on *Operating Profit Margin*

  • Operating Profit Margin* is also called EBITDA Margin
  • Operating Profit Margin* margin indicates the percentage profitability of the company at the operating level

It speaks about the margins of the company

This is a number that helps us compare one stock with another.

For instance, whether SBI is making more profit % or Bank of Baroda or not.

  • Rule #14: Prefer stocks which have good Operating Profit Margins*

because for the same business,

a company with better profit% gets more profits for the same amount of business done.

Now, where do we get these numbers?

They are available on Screener.

  • Assignment Alert*

Open the screener pages for SBI and Bank of Baroda and check for the latest OPM%

Can you notice the OPM numbers?

Which one should we prefer?

Answer this as ur assignment.

Remember,

We need to compare Red Apples with Red Apples and Green Apples with Green Apples

So, SBI should be compared with Bank of Baroda and not with ICICI Bank

Why?

Because SBI is a red apple (public sector bank) while ICICI Bank is a green apple (private sector bank)

In this manner, we shd use PE, P/BV and OPM numbers to decide

1. PE helps: If the share is better or worse than the industry to which it belongs

2. P/BV helps: Which of the shares is trading expensive

3. OPM helps: If one share has better margins over another share in the same industry.

I hope these three ratios are clear.

Question:

Do we need OPM to increase quarter by quarter ?

Like in earlier cases, the OPM numbers need not always increase QoQ

Question:

What are decent numbers for OPM?

By decent numbers, we mean good positive numbers.

At least they should not fluctuate a lot

If they fluctuate, it means they are some issues in regard to performance

For instance Operating profit might get impact due to internal and external factors of the company.

For example:

1. During Chennai floods, Manali Petrochemicals and several others got effected.

2. Similarly, strikes impact operating margins.

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