Evaluating The Profitability Of A Company

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Trend Analysis While ratios are certainly important in evaluating the profitability of a company, it is also important to consider overall trends. An analysis of revenue and net income trends, which can be found in Appendix VII, appears to reveal that 2014 was a standout year for Martinrea. During fiscal years 2012 and 2013, revenue increased by 32.3% and 11.1% respectively over the previous year. However, despite these increases in revenue, net income decreased by 28.9% and 56.3% respectively. In 2014, revenue increased by just 11.7% from the previous year, but net income increased by 320.7%. On the surface, these trends indicate that Martinrea had an amazing turnaround this year, but the notes reveal that this turnaround is not as…show more content…
The combination of these two factors reveals that while Martinrea’s profitability did improve in 2014, bucking the trend of previous years, the extent of this improvement is due in part to fluctuations in deferred taxes, which are entirely temporary have little correlation with improvements in the underlying business. Operating Expenses During 2014, Martinrea’s operating expenses fell by 1.3%, causing operating income to increase by $26,663,000, or 25.3% YoY. Research and development costs increased by $1,548,000, or 9.2% YoY, largely as a result of restructuring costs attributed to the R&D department. Selling, general and administrative expenses increased $20,515,000 or 12.5% YoY, mainly due to new expenses incurred by expanding facilities, increasing employee levels, and higher travel costs. These two large operating expense increases were offset by the complete reduction in Martinrea’s impairment charges. Overall, the small decrease in operating costs is marginally beneficial to Martinrea’s profitability in the short and long-run. Cash Flow Analysis Operating Activities Although net income is an important indicator of financial health, it is not the only metric that can reveal the fiscal strength of a company. In 2014, Martinrea received $264,354,000 in net cash flow from operating activities, which represents an inflow that is 2.96 times greater than its net income of $89,416,000. This margin is reassuring for Martinrea
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