Earning power
Profitability ( profitability ; English profitability , earning power ) is the long-term sustainable profit ability of a company .
General
While the earnings situation is understood to mean the past profit situation, earnings power is a future-related variable. Earning power results from the pursuit of business objectives ( operational purpose ) and formal objectives ( company objectives ), especially in the core business and with cash cows . It is one of the most important assessment criteria not only for the management of a company, but also for its shareholders , banks , suppliers , competitors and the trade unions . As part of controlling, management needs the quantification of profitability in order to be able to assess whether future decisions will be required with regard to profitability. Shareholders are interested in earning power in the context of securities analysis because it can have an impact on price development; however, this is not mandatory. Banks measure profitability in order to determine the debt servicing ability and ultimately the creditworthiness of a borrower as part of the credit check . Also rating agencies determine reward for their ratings . Because the most important goal of the success analysis is to determine and assess profitability.
detection
The annual surplus is a poor indicator of earning power because it also contains extraordinary and one-off effects that neither occur in the long term nor are part of the operational purpose and therefore have to be eliminated. Profit figures are adjusted for extraordinary and one-off effects so that the long-term average profitability can be better reflected. The extraordinary and one-off effects include neutral expenditure and neutral income . EBIT or operating profit best meet the criteria of operational efficiency and regularity.
By creating and maintaining hidden reserves , the external analyst underestimates the earning power; if it is dissolved it is overestimated. This is because the permissible application of the lowest value principle means that assets are valued lower and debts higher than their present value. Only the higher valuation of debts is noticeable , for example, through the addition to provisions . The release of hidden reserves, on the other hand, is always recognizable through book profits and the release of provisions, which are to be added to the extraordinary income.
Key figures
There is, however, no single economic key figure for measuring profitability ; only the combination of several key figures gives a complete picture of operational profitability. The ultimate goal of analyzing the data from annual financial statements is to derive indications of future profitability from the past, as only a company with stable profitability can secure its long-term existence by maintaining and continuously improving its performance through the formation of reserves .
The starting point is the operating result, with which the operating profitability can be determined. Other accompanying key figures are return on sales , return on equity or return on total capital . The EBIT / Cash flow measures the self-financing capacity , which is an important indicator of profitability. Future sales development, cash flow and earnings per share are also indicators of profitability.
Legal issues
The earnings situation is a legal term . In accordance with Section 246 (2) of the German Commercial Code ( HGB) , the annual financial statements of the corporation must give a true and fair view of the asset, financial and earnings position of the corporation in accordance with the principles of proper accounting .
literature
- Literature on profitability in the catalog of the German National Library
Individual evidence
- ↑ Guido A. Scheld / Claudia Demming, Fundamentale Aktienanalyse , in: WISU 1993, p. 306
- ↑ Hilmar J. Vollmuth, Key Figures , 2006, p. 72
- ↑ Marcus Hopf, Fundamentale Aktienanalye: Presentation and Criticism , 2002, p. 16.
- ↑ a b Hilmar J. Vollmuth, Reading the balance sheet correctly, understanding it better, designing it optimally , 2009, p. 199.
- ↑ Standard & Poor’s , Corporate Ratings Criteria 2006 , 2006, p. 26 f.
- ↑ Bärbel Hepperle, analysis of the earnings situation based on annual financial statements according to International Accounting Standards (IAS) , 2001, p. 22.
- ↑ Horst-Thilo Beyer (Ed.), Finanzlexikon , 1971, p. 114
