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At a very high level a company's profitability is determined by a few factors: 1.) how much are they able to change for their good/service 2.) what is the cost involved with offering that good/service 3.) what are other costs involved in running the business. As an example, if I company makes $1M in revenue and the costs involved in creating the goods/services is $400k, then this is a 60% gross margin business (Revenue-cost of goods). You also need to think about what other costs are necessary to run the business (e.g. rent, office supplies, marketing, salaries, etc.). In the example above, lets say that the company needs to spend another $200k to run their business (e.g. pay rent, pay their people, keep the lights on, etc). This means that the company is left with $400k in "profit." The key to increasing profitability is to keep the costs of actually creating/delivering the good/service reasonable and make sure you can also cover your other expenses. If you can find ways to reduce either of those buckets of costs, then you have increased the "profitability" of your business.
For public companies, to determine the "earnings per share" a company simply takes their "earnings" or "profits" and divides it by the number of shares of the company. Lets say a company has issued 1M shares. This means to get "earnings per share" was simply divide $200k by 1M shares. This gives you a "earnings per share" of $0.2/share.
If you want to get "price to sales" take the market capitalization of the company (price per share x # of shares outstanding) and divide by "sales" or "revenue." In the example above, lets say the each share of the company is trading at $20/share and their are 1M shares outstanding. This means the market cap of the company is $20M. Simply take the $20M and divide by their revenue ($1M in our example) and you get a "price to sales" of 20. What this number is telling you is that for every $1 of revenue the company generates, you are paying $20 to own a share of that company.
For public companies, to determine the "earnings per share" a company simply takes their "earnings" or "profits" and divides it by the number of shares of the company. Lets say a company has issued 1M shares. This means to get "earnings per share" was simply divide $200k by 1M shares. This gives you a "earnings per share" of $0.2/share.
If you want to get "price to sales" take the market capitalization of the company (price per share x # of shares outstanding) and divide by "sales" or "revenue." In the example above, lets say the each share of the company is trading at $20/share and their are 1M shares outstanding. This means the market cap of the company is $20M. Simply take the $20M and divide by their revenue ($1M in our example) and you get a "price to sales" of 20. What this number is telling you is that for every $1 of revenue the company generates, you are paying $20 to own a share of that company.
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James O'Shaughnessy book "What Works on Wall Street" suggests, The cornerstone value strategy selects stocks with low price-to-sales ratios (not hyped) below 1.5 and the best 1 year price appreciation for the all stocks group. The 1.5 price-to-sales ratio allows more growth stocks.
Should I look at book value as a measurement of company profitability?
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total revenue - total liability = profitability
also referred to as book value
also referred to as book value
Profit is revenue minus expenses and other liabilities.
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