Gross Profit Margin

According to the date, the percentage of revenue left after subtracting the cost of goods sold is constantly improving, which means that SAP’s development and distribution efficiency during the production process is also improving. That is, SAP is constantly improving its ability to make a decent profit as long as overhead costs are controlled. This can be of a great importance for potential investors who would be willing to pay more for businesses that have high efficiency ratings.

What also appears to be important from the above comparison through the years is that the gross margin tends to remain stable over time. Significant fluctuations can be a potential sign of fraud or accounting irregularities. Net Profit Margin This ratio measures the percentage of each sales dollar remaining after all costs and expenses, including interest, taxes, and preferred stock dividends, have been deducted. It essentially expresses the overall cost/price effectiveness of the operation. The ratio is calculated as follows:

Net Profit Margin = Net Profit? / Turnover The table below presents how the net profit margin for SAP varies for the last 5 years (1999 – 2003): To get a better understanding of the net profit margin it is good to make a comparison between this ratio and the gross profit ratio. Only in this way a good impression can be gained of the company’s non-production and non-direct costs such as administration, marketing and finance costs. Through some of the monitored years SAP keeps a pretty small difference between the net profit and the gross profit margin values. However there is a tendency for broadening the difference between the two ratios each time the revenues are going up.

This can be explained either by problems maintaining its cost structure, or by implementing a new pricing strategy which sometimes results in lower profits. But what is more likely is that with the increase of its revenues SAP has increased its expenses for R&D (Research and Development) thus trying to be more innovative and to keep its leading position on the market. More evidences supporting this theory can be found in the Consolidated Income Statement where it is evident the constant increase of the R&D expenses from $749 million in 1999 to $1,254 million in 2003. If this is the case, this indicates management’s ability to operate the business with sufficient success.

Success in this case means not only recovering the cost of the merchandise or services, the expenses of operating the business (including depreciation), the cost of borrowed funds, and leaving a margin of reasonable compensation to the owners for putting their capital at risk, but furthermore, developing innovations that will lead to significant increase in revenues and market presence in the future.

Operating Profit Margin

This ratio measures the percentage of each sales dollar remaining after all costs and expenses other than interest, taxes, and preferred stock dividends are deducted. It represents the “pure profits” earned on each sales dollar. Operating profits are “pure” because they measure only the profits earned on operating and ignore interests, taxes, and preferred stock dividends. It is calculated as follows:

Operating Profit Margin = Operating Profits / Turnover The table below presents how the operating profit margin for SAP varies for the last 5 years (1999 – 2003) There is a positive trend for SAP to constantly increase its operating profit margin, which means that the company generates more money from its own operations (it does not include income from investments in other businesses, for instance) and improves its management efficiency each year. Therefore, it can be stated that the “general health” of the core SAP business is continuously improving.

Return on Total Assets (ROA)

The ROA, often called the return on investment (ROI), measures the overall effectiveness of management in generating profits with its available assets. The higher the ratio the greater the return on assets. The ROA is calculated as follows: ROA = Earnings Available for Common Stockholders / Total Assets The table below presents how the ROA for SAP varies for the last 5 years (1999 – 2003): These values indicate how much SAP has earned on each dollar of asset investment.

That is, in 1999 the company has earned 9 cents on each dollar of asset investment and has almost doubled these values during the years to reach 17 cents per dollar of asset investment in 2003. Each time SAP increases the profit per dollar of asset its business becomes less asset-intensive. This means that the company needs less money to reinvest into its business to continue generating earnings. Therefore, during the period between 1999 and 2002 SAP has spent more money in order to run its business until the year 2003 when it increased its ROA ratio with 7 %.