The Income Statement: HOW PROFITABLE IS THE COMPANY?
Saturday, October 3rd, 2009The income statement answers the question:
HOW PROFITABLE IS THE COMPANY?
The best measure of a company’s profitability on its investments (total assets or total debt and equity) is OPERATING INCOME. This figure measures the company profitability before any money is distributed to investors and creditors.
For example, let’s assume that a company’s total assets are $100,000 (financed with $40,000 in debt and $60,000 in equity) and that operating income is $15,000 and net income is $10,000. Thus, the firm’s management used $100,000 of investment to generate $15,000 in operating profits; it generated a 15% return on investment (ROI). The net income figure of $10,000 – on the other hand – is the income that remains for the owners after paying interests and taxes and it does not represent a measure of the return on the company’s investments. The owners can then decide to reinvest this income or take them out as dividends.
