Estimating Net Profit Margin (MSFT)
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Estimating Net Profit Margin (MSFT) The second judgment you will need to predict Microsoft's earnings tomorrow is an estimate of their net margin for the quarter. Margin will be affected by their expenses. It's a long way from the top line of a companies income statement (Sales) to the very bottom line (Net Income). In between are all the expenses involved in running the business. As you move down the income statement, there are stopping points where only certain types of expenses have been subtracted. At each of these points, different types of margin can be calculated. For example, gross profit is the sales of a company minus the cost of whatever it is selling. Gross profit divided by sales is gross profit margin. Operating income is calculated by subtracting all the other regular costs of running the business from the gross profit. We sometimes think of these costs as "overhead" costs. Operating income divided by sales gives us Operating margin. After that are costs (and income) which occur infrequently but are not unusual for the company. They might affect one quarter but not another. When we subtract those costs from operating income, we get pre-tax profit. As it's name indicates, we subtract taxes from that to get to the bottom line or Net income. Net income is what we use to calculate the second judgment item we have to make to project earnings, Net Profit Margin. It is Net Income Divided by Sales. The second sheet of the attached spreadsheet shows you income statement information for the past 5 quarters for Microsoft. You'll see the different Margins highlighted in pink as you move from the top to the bottom. When a company discusses it's future expenses, you can get a sense of which of these expense categories might change and by how much. That will lead you to judge how the net margin might change in the future and therefore how it's future earnings might be affected. As you look at the data for Microsoft, two things pop out at you. First is the fact that Microsoft has pretty high margins. They are able to keep a nice percentage of their sales as profits. Second is the fact that they manage the business well and maintain their margins pretty consistently. This is encouraging since we are making an attempt to predict the future using past history. If you own Microsoft, you should have some sense of what types of expenses or unusual income they expect in the future so that you can judge whether you should be a little more conservative or aggressive in projecting their margins into the future. As with sales projections, Microsoft management provides a nice discussion of these factors in the Management Discussion and Analysis section of their last Quarterly financial statement (June 10-K) and Earnings conference call. If you want some other points of reference to help you make the analysis of Net Profit Margin, ManifestInvesting is using 29% for their PAR calculation. The analysts at Valueline expect 30.7% for 2011 and 33.1% for the 2013-2015 time frame, Morningstar reports that the average for the Net Margin for the past 5 years is 28%. Based on what you see is ahead for Microsoft's business, what Net Margin to you think they'll be able to achieve in the future? What do you think they'll report they achieved during the first quarter earnings announcement on Thursday? Plug this into the spreadsheet along with your projection of sales growth and check in on Thursday to see how close your projection came to their report! I hope you'll participate in our contest by entering your projections Thursday before 2PM EDT here: https://spreadsheets.google.com/viewform?formkey=dEtYZU54RHN4RDhKa3BxWjF1LVJDemc6MA It's easy to try. Don't forget you might earn $20 bivio bucks toward your next subscription renewal if your estimate comes closest to what is reported! -- Laurie Frederiksen Invest with your friends! www.bivio.com Become our Facebook friend! www.facebook.com/bivio Follow us on twitter! www.twitter.com/bivio |
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