| Getting to Know the Numbers |
Learn to make sense of companies' financial statements, and valuable insights will be yours. Let's review the income statement (sometimes called the statement of operations) and margins. The income statement summarizes sales and profits over a period of time, such as three months or a year. It usually offers information for the year-ago period as well, so you can compare the two and spot trends. Consider Hershey's income statement for Q2 2002. At the top, as with every income statement, you'll find net sales (sometimes called revenues). For Hershey, they're $823 million. As we work our way down the income statement, various costs will be subtracted from the revenues, leaving different levels of profit. The item you'll find just under revenues is "cost of goods sold" (abbreviated as COGS, and sometimes called cost of sales), which represents the cost of producing the products or services sold. For Hershey, it's $510 million. Subtract the COGS from revenues, and you'll get a gross profit of $313 million. To find the gross margin, which reflects the costs of production compared to sales proceeds, simply divide the gross profit by revenues. Dividing $313 million by $823 million yields a gross margin of 0.38, or 38%. (It's often illuminating to compare the results with industry peers. For example, gross margin is 46% for Tootsie Roll, a considerably smaller company in the same industry.) Next, the remaining costs involved in operating the business, such as support-staff salaries, utility bills, and advertising expenses, are subtracted, leaving the operating profit. Hershey's operating profit is $115 million. Dividing this by revenues yields an operating margin of 14%, revealing the profitability of the company's principal business. (Tootsie Roll comes in with a stronger 23%.) Finally, after items such as taxes and interest payments are accounted for, we come to net income, near the bottom of the statement. Hershey's is $63 million. Dividing that by revenues yields a net profit margin of 8%. This number reflects how much of every dollar of sales a company keeps as profit. (Tootsie Roll: 15%. Examining margins alone, Tootsie Roll is the stronger company.) That's it!
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