K + S Group Profitability

Profitability

The concept of profitability is perhaps the easiest for me to grasp within this course and the Study Guide suggests that this is normal for most people. In order to make owning a company worthwhile, the business must be able to generate a profit above what could otherwise be earned by simply working or investing in another business in that industry. The profit margin and return on assets ratio focuses our attention on the profitability of each dollar of sales and provides a summary of how our assets are performing.

K + S Group Profitability Ratios

		2014	2013	2012	2011
Net Profit Margin	Net profit after tax/sales	18.7%	8.2%	16.9%	16.8%
Return on Assets	Net profit after tax/total assets	15.0%	7.2%	18.3%	20.0%

KCQ: We define profit margin (PM) as: PM = OI/Sales (or Revenue)

Where OI = operating income after tax 

KCQ: Return on Assets (ROA) is defined as:  OI/NOA

Where NOA = net operating assets

According to the Study Guide, the ‘average’ profit margin in the US is about 6%, but can vary widely between industries and between companies within industries (Turner 2016).

So for every euro of sales, K + S Group are making 18.7 cents (cent euro) in 2014. This is compared to 8.2 cents in 2013. This corresponds with information in the 2014 Annual Report, referring to 30^th July 2013 as ‘Black Tuesday’ for the Potash industry. This followed an aggressive product volume strategy from key competitors in Russia that substantially dropped global prices for potassium chloride. Although the K + S Group share price recovered for the close of 2013, the lowest price per share reflects this drop, with 15.92 the lowest reported in five years. 

		2014	2013	2012	2011
Economic profit	(RNOA - cost of capital) x net operating assets (NOA)	238.4	324.3	663.3	672.3

K + S Group are still reporting substantial economic profit, with a 2014 figure of 238.4 million euro. However, it’s obvious that the Group have had to aggressively adapt to a changed market. With a loss of 330 million between 2012 and 2013, global influences such as the war in Syria, the American dollar, and the change in competitors strategy from pricing to volume have had a substantial negative effect on the Group’s economic profit.

Fortunately, there are positive indicators from the other profit ratios. The positive ROA and PM ratios for 2014 likely reflect the impacts of a renewed focus on efficiency, referred to as the ‘Fit for the future’ program.