Looking at a company’s profitability is a very important step in understanding a company. Profitability is essentially why the company exists and is a key component while deciding to invest or to stay invested in a company. There are many metrics involved in calculating profitability, but for this analysis, I will look at Yamana Gold Inc.’s earnings and earnings Growth, profit margins, and profitability ratios.
Through the above-mentioned three main metrics, we will understand more about the Goldcorp’s profitability and if this summary is compared with other companies in the same sector, you will be able see which has been the most profitable.
Earnings and Earnings Growth
1. Earnings = sales x profit margin
• 2010 – $ 1.686 billion x 27.63% = $466 million
• 2011 – $2.173 billion x 25.21% = $548 million
Yamana Gold’s earnings increased from $466 million in 2010 to $548 million in 2011 or by 17.59%.
2. Earnings per share = net income / shares outstanding
• 2010 – $466 million / 741.36 million = $.63
• 2011 – $548 million / 745.77 million = $.74
Goldcorp’s earnings per share increased from $.63 in 2010 to $.74 in 2011.
3. Five-year historical look at earnings growth
• 2007 – $157 million,
• 2008 – $434 million, 276% increase
• 2009 – $192 million, 226% decrease
• 2010 – $466 million, 242% increase
• 2011 – $548 million, 17% increase
In analyzing the earnings growth of Yamana Gold over the past five years, you can see the company’s earnings have been increasing relatively evenly over the past 5 years with the exception of 2009. The decrease in earnings in 2009 was due to the recession in late 2008 into 2009 and the subsiquent fall in the price of gold. As the price of gold has recovered so have the company’s earnings.
Profit Margins
4. Gross Profit = Total sales – cost of sales
When analyzing a company, gross profit is very important because it indicates how efficiently management uses labor and supplies in the production process. More specifically, it can be used to calculate gross profit margin.
• 2010 – $1.686 billion – $631 million = $1.055 billion
• 2011 – $2.173 billion – $716 million = $1.457 billion
5. Gross Profit Margin = Gross Income / Sales
The gross profit margin is a measurement of a company’s manufacturing and distribution efficiency during the production process. The gross profit tells an investor the percentage of revenue/ sales left after subtracting the cost of goods sold. A company that boasts a higher gross profit margin than its competitors and industry is more efficient. Investors tend to pay more for businesses that have higher efficiency ratings than their competitors, as these businesses should be able to make a decent profit as long as overhead costs are controlled (overhead refers to rent, utilities, etc.)
• 2007 – $639 million / $416 million = 53.60%
• 2008 – $949 million / $535 million = 77.38%
• 2009 – $1.183 billion / $703 million = 68.27%
• 2010 – $1.055 billion / $1.686 billion = 62.57%
• 2011 – $1.457 billion / $2.173 billion = 67.05%
Like the earnings the gross margin percentage has been very steady with a low of 53.60% in 2007 to a high of 77.38% in 2008.
6. Operating income = Total sales – operating expenses
The amount of profit realized from a businesses operations after taking out operating expenses – such as cost of goods sold (COGS) or wages – and depreciation. Operating income takes the gross income (revenue minus COGS) and subtracts other operating expenses and then removes depreciation. These operating expenses are costs that are incurred from operating activities and include things such as office supplies and heat and power.
• 2010 – $631.43 million
• 2011 – $852.36 million
7. Operating Margin = operating income / total sales
Operating margin is a measure of what proportion of a company’s revenue is left over after paying for variable costs of production such as wages, raw materials, etc. A healthy operating margin is required for a company to be able to pay for its fixed costs, such as interest on debt.
If a company’s margin is increasing, it is earning more per dollar of sales. The higher the margin, the better.
• 2007 – $291.11 million / $639 million = 45.55%
• 2008 – $263.00 million / $949 million = 27.71%
• 2009 – $341.85 million / $1.183 billion = 28.89%
• 2010 – $631.43 million / $1.055 billion = 59.85%
• 2011 – $852.36 million / $1.457 billion = 58.50%
As the company’s 2011 gross margin is 58.50% it states that the company is able to pay for its fixed costs.
8. Net Profit Margin = Net income / total sales
A ratio of profitability calculated as net income divided by revenues, or net profits divided by sales. It measures how much out of every dollar of sales a company actually keeps in earnings.
Profit margin is very useful when comparing companies in similar industries. A higher profit margin indicates a more profitable company that has better control over its costs compared to its competitors. Profit margin is displayed as a percentage; a 20% profit margin, for example, means the company has a net income of $0.20 for each dollar of sales.
• 2007 – $460 million / $2.206 billion = 20.85%
• 2008 – $1.475 billion / $2.419 billion = 60.97%
• 2009 – $240 million / $2.723 billion = 8.81%
• 2010 – $1.574 billion / $3.738 billion = 42.10%
• 2011 – $1.881 billion / $5.362 billion = 35.08%
Like the earnings the net profit margin has been very volitile over the past 5 years. As the number was at 35.08% in 2011, this is a healthy margin. As the price of gold dropped significantly in late 2008 and stayed low into 2009 it would have had a large impact on the profit margin reported in 2009. As the price of gold recovered so did the margin.
9. SG&A % Sales = SG&A / total sales
Reported on the income statement, it is the sum of all direct and indirect selling expenses and all general and administrative expenses of a company.
High SG&A expenses can be a serious problem for almost any business. Examining this figure as a percentage of sales or net income compared to other companies in the same industry can give some idea of whether management is spending efficiently or wasting valuable cash flow.
• 2007 – $132.9 million / $2.206 billion = 6.02%
• 2008 – $131.0 million / $2.419 billion = 5.41%
• 2009 – $133.1 million / $2.723 billion = 4.88%
• 2010 – $184.0 million / $3.738 billion = 4.92%
• 2011 – $229.0 million / $5.362 billion = 4.27%
As the SG&A % Sales decreased, it implies that management is spending more efficiently.
Summary
In analyzing Yamana gold’s profitability, it displays very even results. Based on the above analysis, Yamana Gold has displayed strong earnings with consistent results in profitability.
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