Evaluating a company: Gross vs net

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Evaluating a company: Gross vs net

Last year, we discussed some fundamentals when it comes to evaluating a company to determine whether it is a worthy investment. There are still so many more factors that you can consider that it can make your head spin. But, you still need to have a basic understanding of a few more concepts.

“Of course, profits, losses, and sales figures should be major considerations when deciding if a company is successful,” explains Richard Cayne of Meyer International. “But there are nuances to how these concepts are defined and reported that investors need to be aware of.”

How is gross different from net?

“Gross” and “net” can be used to describe many types of calculations as they describe basically the same thing. “Gross” refers to an amount before accounting for any adjustments – “net” is the amount after adjustments. So, “gross profit” is the total amount of money earned by an entity, often regardless of the source. But, this is not a full picture since usually a company must spend money as well. “Net profit” reflects the total profit after deducting costs of goods and other outlays.

When looking at financial reports, you may see profits, losses, sales, and other results in their gross and net forms. Often the percentage difference of each amount from the previous year, or margin, will also appear as an indication of growth or loss.

Why do you need to consider both net and gross figures?

Seeing the difference between a company’s gross and net figures can give you insight into its operations. If a company has high gross profits that are then greatly lowered when net profit is calculated could mean that operating costs need to be streamlined. Could the company survive if its earnings drop while it still needs to spend the same amount in the future? Conversely, if a company skimps on its expenditures, will that affect its performance in the face of changing economic climes or competition?

“Companies will want to report their financials in the best light possible, but there are numbers that they cannot hide,” says Richard. “Being able to understand, and therefore question, a company’s performance will go a long way when you decide what to add to your portfolio.”

If you have any questions regarding how to evaluate a company’s financials, feel free to contact Richard at Meyer International.

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