Evaluating The Profitability Of A Company

1207 Words Nov 27th, 2015 5 Pages
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 significant as it appears. Comparing net income before tax reveals an increase of 24.6%, a value which is much more consistent with expectations given an increase in revenue of 11.7%. This is not to say that Martinrea’s profitability did not improve; the 24.6% increase in net income before tax is certainly a positive sign. However, by comparing the increase in pre-tax net income to the increase in after-tax net income, it is clear where a majority of the increase is coming from. Despite earning 24.6% more income, Martinrea actually paid 57.5% less tax. This is due to a $21,226,000 deferred income tax recovery in 2014, as well as a $14,839,000 deferred income tax expense in 2013. These expenses are non-cash, and they are a result of adjustments…
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