Analysis of Profitability Ratios
Profitability ratios measure the company ability to generate profitable sales from its resources (assets).
Profitability Ratios (Summary)
Return on Sales
Return on Investment
Reynolds American Inc., profitability ratios
Based on: 10-K (reporting date: 2016-12-31), 10-K (reporting date: 2015-12-31), 10-K (reporting date: 2014-12-31), 10-K (reporting date: 2013-12-31), 10-K (reporting date: 2012-12-31).
The profitability profile from 2012 to 2016 is characterized by a strong and consistent expansion of profit margins, contrasting with more volatile trends in returns on equity and assets. While the company significantly enhanced its ability to convert revenue into profit, the returns on invested capital experienced a notable contraction in 2015 before recovering in 2016.
- Margin Expansion
- A sustained upward trend is observed across all margin metrics. Gross profit margin increased from 32.58% in 2012 to 45.48% in 2016, indicating improved cost of goods sold management or pricing power. This growth is mirrored in the net profit margin, which rose from 10.40% to 36.05% over the same period.
- Operating Efficiency
- Operating profit margin demonstrated the most aggressive growth, particularly between 2014 and 2016. After a slight dip to 20.92% in 2014, the margin surged to 46.71% in 2015 and reached 62.74% by 2016. The fact that operating margin grew faster than gross margin suggests a significant optimization of operating expenses and increased operational leverage.
- Return on Equity (ROE)
- ROE exhibited volatility, peaking at 33.25% in 2013 before declining sharply to a period low of 17.82% in 2015. A recovery followed in 2016, with ROE rising to 27.97%. The divergence between rising profit margins and falling ROE in 2015 suggests a substantial increase in the equity base during that year.
- Return on Assets (ROA)
- ROA followed a trajectory similar to ROE, with an initial increase to 11.15% in 2013, followed by a decline to 6.11% in 2015. By 2016, ROA reached its peak for the period at 11.89%. The dip in 2015, occurring despite improving margins, indicates an expansion of the asset base that temporarily outpaced the growth in net income.
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Gross Profit Margin
Reynolds American Inc., gross profit margin calculation, comparison to benchmarks
| Dec 31, 2016 | Dec 31, 2015 | Dec 31, 2014 | Dec 31, 2013 | Dec 31, 2012 | ||
|---|---|---|---|---|---|---|
| Selected Financial Data (US$ in millions) | ||||||
| Gross profit | 7,662) | 5,987) | 4,413) | 4,558) | 3,983) | |
| Net sales, includes excise taxes | 16,846) | 14,884) | 12,096) | 11,966) | 12,227) | |
| Profitability Ratio | ||||||
| Gross profit margin1 | 45.48% | 40.22% | 36.48% | 38.09% | 32.58% | |
| Benchmarks | ||||||
| Gross Profit Margin, Competitors2 | ||||||
| Coca-Cola Co. | — | — | — | — | — | |
| Mondelēz International Inc. | — | — | — | — | — | |
| PepsiCo Inc. | — | — | — | — | — | |
| Philip Morris International Inc. | — | — | — | — | — | |
Based on: 10-K (reporting date: 2016-12-31), 10-K (reporting date: 2015-12-31), 10-K (reporting date: 2014-12-31), 10-K (reporting date: 2013-12-31), 10-K (reporting date: 2012-12-31).
1 2016 Calculation
Gross profit margin = 100 × Gross profit ÷ Net sales, includes excise taxes
= 100 × 7,662 ÷ 16,846 = 45.48%
2 Click competitor name to see calculations.
The financial trajectory from 2012 to 2016 demonstrates a consistent strengthening of gross profitability. The gross profit margin experienced a cumulative increase of 1,290 basis points, rising from 32.58% in 2012 to 45.48% by the end of 2016.
- Gross Profit Trends
- Gross profit grew from 3,983 million US$ in 2012 to 7,662 million US$ in 2016. Although a marginal decrease occurred in 2014, the subsequent growth in 2015 and 2016 was substantial, with gross profit nearly doubling between 2014 and 2016.
- Revenue and Margin Correlation
- Net sales remained relatively stable between 2012 and 2014, fluctuating slightly around the 12 billion US$ mark. A significant shift occurred in 2015, with net sales increasing to 14,884 million US$ and further ascending to 16,846 million US$ in 2016. The concurrent rise in both net sales and gross profit margin indicates that revenue growth was accompanied by improved cost efficiencies or increased pricing power.
- Margin Expansion Analysis
- The gross profit margin showed an initial increase to 38.09% in 2013, followed by a slight contraction to 36.48% in 2014. From 2015 onward, the margin exhibited accelerated growth, surpassing the 40% threshold in 2015 and peaking at 45.48% in 2016. This pattern suggests a sustained improvement in the company's ability to manage the direct costs associated with its sales.
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Operating Profit Margin
Reynolds American Inc., operating profit margin calculation, comparison to benchmarks
| Dec 31, 2016 | Dec 31, 2015 | Dec 31, 2014 | Dec 31, 2013 | Dec 31, 2012 | ||
|---|---|---|---|---|---|---|
| Selected Financial Data (US$ in millions) | ||||||
| Operating income | 10,569) | 6,953) | 2,531) | 3,132) | 2,214) | |
| Net sales, includes excise taxes | 16,846) | 14,884) | 12,096) | 11,966) | 12,227) | |
| Profitability Ratio | ||||||
| Operating profit margin1 | 62.74% | 46.71% | 20.92% | 26.17% | 18.11% | |
| Benchmarks | ||||||
| Operating Profit Margin, Competitors2 | ||||||
| Coca-Cola Co. | — | — | — | — | — | |
| Mondelēz International Inc. | — | — | — | — | — | |
| PepsiCo Inc. | — | — | — | — | — | |
| Philip Morris International Inc. | — | — | — | — | — | |
Based on: 10-K (reporting date: 2016-12-31), 10-K (reporting date: 2015-12-31), 10-K (reporting date: 2014-12-31), 10-K (reporting date: 2013-12-31), 10-K (reporting date: 2012-12-31).
1 2016 Calculation
Operating profit margin = 100 × Operating income ÷ Net sales, includes excise taxes
= 100 × 10,569 ÷ 16,846 = 62.74%
2 Click competitor name to see calculations.
The operating profitability of Reynolds American Inc. underwent a substantial transformation between 2012 and 2016, characterized by a sharp acceleration in the operating profit margin during the final two years of the period.
- Operating Profit Margin Trajectory
- A volatile but generally upward trend is evident. The margin began at 18.11% in 2012 and experienced fluctuations in 2013 and 2014, recording 26.17% and 20.92% respectively. A significant inflection point occurred after 2014, with the margin ascending rapidly to 46.71% in 2015 and culminating at 62.74% by December 31, 2016.
- Revenue and Operating Income Correlation
- While net sales remained relatively stable between 2012 and 2014, moving from 12,227 million to 12,096 million, subsequent years showed steady growth, reaching 16,846 million by 2016. In contrast, operating income grew at a disproportionately faster rate, rising from 2,214 million in 2012 to 10,569 million in 2016. This divergence indicates a substantial improvement in operational efficiency or a fundamental shift in the cost structure.
- Operational Efficiency Insights
- The exponential increase in the operating profit margin from 20.92% in 2014 to 62.74% in 2016 suggests that the growth in operating income was not merely a result of increased sales volume. The data points toward a significant expansion in the company's ability to control operating expenses relative to its revenue growth, resulting in a drastically higher percentage of each sales dollar reaching the operating income line.
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Net Profit Margin
Reynolds American Inc., net profit margin calculation, comparison to benchmarks
| Dec 31, 2016 | Dec 31, 2015 | Dec 31, 2014 | Dec 31, 2013 | Dec 31, 2012 | ||
|---|---|---|---|---|---|---|
| Selected Financial Data (US$ in millions) | ||||||
| Net income | 6,073) | 3,253) | 1,470) | 1,718) | 1,272) | |
| Net sales, includes excise taxes | 16,846) | 14,884) | 12,096) | 11,966) | 12,227) | |
| Profitability Ratio | ||||||
| Net profit margin1 | 36.05% | 21.86% | 12.15% | 14.36% | 10.40% | |
| Benchmarks | ||||||
| Net Profit Margin, Competitors2 | ||||||
| Coca-Cola Co. | — | — | — | — | — | |
| Mondelēz International Inc. | — | — | — | — | — | |
| PepsiCo Inc. | — | — | — | — | — | |
| Philip Morris International Inc. | — | — | — | — | — | |
Based on: 10-K (reporting date: 2016-12-31), 10-K (reporting date: 2015-12-31), 10-K (reporting date: 2014-12-31), 10-K (reporting date: 2013-12-31), 10-K (reporting date: 2012-12-31).
1 2016 Calculation
Net profit margin = 100 × Net income ÷ Net sales, includes excise taxes
= 100 × 6,073 ÷ 16,846 = 36.05%
2 Click competitor name to see calculations.
Reynolds American Inc. demonstrated a significant upward trajectory in profitability over the five-year period ending December 31, 2016. The net profit margin expanded from 10.40% in 2012 to 36.05% in 2016, reflecting a substantial increase in the efficiency of converting revenue into net earnings.
- Net Profit Margin Trends
- The profit margin exhibited a non-linear growth pattern. Following an initial rise to 14.36% in 2013, there was a moderate decline to 12.15% in 2014. This was followed by a sharp acceleration, with the margin increasing to 21.86% in 2015 and reaching a peak of 36.05% in 2016.
- Revenue and Income Correlation
- Between 2012 and 2014, net sales remained relatively stable, fluctuating around the $12 billion mark. However, from 2015 onward, a period of aggressive growth occurred. While net sales increased from $12,096 million in 2014 to $16,846 million in 2016, net income grew at a disproportionately higher rate, rising from $1,470 million to $6,073 million. This divergence indicates that the increase in net income was driven not only by higher sales volume but also by significant expansions in operational profitability.
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Return on Equity (ROE)
Reynolds American Inc., ROE calculation, comparison to benchmarks
| Dec 31, 2016 | Dec 31, 2015 | Dec 31, 2014 | Dec 31, 2013 | Dec 31, 2012 | ||
|---|---|---|---|---|---|---|
| Selected Financial Data (US$ in millions) | ||||||
| Net income | 6,073) | 3,253) | 1,470) | 1,718) | 1,272) | |
| Shareholders’ equity | 21,711) | 18,252) | 4,522) | 5,167) | 5,257) | |
| Profitability Ratio | ||||||
| ROE1 | 27.97% | 17.82% | 32.51% | 33.25% | 24.20% | |
| Benchmarks | ||||||
| ROE, Competitors2 | ||||||
| Coca-Cola Co. | — | — | — | — | — | |
| Mondelēz International Inc. | — | — | — | — | — | |
| PepsiCo Inc. | — | — | — | — | — | |
| Philip Morris International Inc. | — | — | — | — | — | |
Based on: 10-K (reporting date: 2016-12-31), 10-K (reporting date: 2015-12-31), 10-K (reporting date: 2014-12-31), 10-K (reporting date: 2013-12-31), 10-K (reporting date: 2012-12-31).
1 2016 Calculation
ROE = 100 × Net income ÷ Shareholders’ equity
= 100 × 6,073 ÷ 21,711 = 27.97%
2 Click competitor name to see calculations.
The financial performance from 2012 to 2016 is characterized by substantial growth in net income and a significant reconfiguration of shareholders' equity, leading to notable volatility in the return on equity (ROE).
- Net Income Trajectory
- Net income exhibited a strong upward trend over the five-year period. Following a moderate increase between 2012 and 2013 and a slight correction in 2014, earnings grew exponentially, reaching 6,073 million by 2016. This represents a nearly fivefold increase from the 2012 baseline.
- Shareholders' Equity Shift
- Equity levels remained relatively stable with a slight downward trend between 2012 and 2014. However, a dramatic increase occurred in 2015, where equity rose from 4,522 million to 18,252 million, further increasing to 21,711 million in 2016. This substantial expansion of the equity base significantly altered the company's capital structure during the latter half of the period.
- Return on Equity (ROE) Analysis
- ROE experienced significant fluctuations driven by the inverse relationship between earnings growth and equity expansion. From 2012 to 2014, ROE increased and stabilized at high levels, peaking at 33.25% in 2013; this was primarily driven by rising net income coupled with a contracting equity base. In 2015, ROE dropped sharply to 17.82%, as the equity base expanded at a rate that far outpaced the growth in net income. By 2016, ROE recovered to 27.97%, reflecting a surge in absolute earnings that began to offset the enlarged capital base.
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Return on Assets (ROA)
Reynolds American Inc., ROA calculation, comparison to benchmarks
| Dec 31, 2016 | Dec 31, 2015 | Dec 31, 2014 | Dec 31, 2013 | Dec 31, 2012 | ||
|---|---|---|---|---|---|---|
| Selected Financial Data (US$ in millions) | ||||||
| Net income | 6,073) | 3,253) | 1,470) | 1,718) | 1,272) | |
| Total assets | 51,095) | 53,224) | 15,196) | 15,402) | 16,557) | |
| Profitability Ratio | ||||||
| ROA1 | 11.89% | 6.11% | 9.67% | 11.15% | 7.68% | |
| Benchmarks | ||||||
| ROA, Competitors2 | ||||||
| Coca-Cola Co. | — | — | — | — | — | |
| Mondelēz International Inc. | — | — | — | — | — | |
| PepsiCo Inc. | — | — | — | — | — | |
| Philip Morris International Inc. | — | — | — | — | — | |
Based on: 10-K (reporting date: 2016-12-31), 10-K (reporting date: 2015-12-31), 10-K (reporting date: 2014-12-31), 10-K (reporting date: 2013-12-31), 10-K (reporting date: 2012-12-31).
1 2016 Calculation
ROA = 100 × Net income ÷ Total assets
= 100 × 6,073 ÷ 51,095 = 11.89%
2 Click competitor name to see calculations.
The financial performance between 2012 and 2016 is characterized by a substantial increase in net income and a significant expansion of the asset base, resulting in notable volatility in asset utilization efficiency.
- Net Income Trajectory
- Net income exhibited a strong upward trend over the five-year period, rising from US$ 1,272 million in 2012 to US$ 6,073 million in 2016. Despite a moderate decline in 2014 to US$ 1,470 million, the subsequent two years saw exponential growth, with the 2016 figure representing nearly a five-fold increase compared to the 2012 baseline.
- Asset Base Evolution
- Total assets remained relatively stable between 2012 and 2014, fluctuating slightly between US$ 15,196 million and US$ 16,557 million. A sharp structural shift occurred in 2015, with assets increasing to US$ 53,224 million, indicating a major capital expansion or acquisition. This elevated asset level was maintained into 2016 at US$ 51,095 million.
- Return on Assets (ROA) Analysis
- The ROA experienced significant fluctuations, starting at 7.68% in 2012 and reaching a peak of 11.89% in 2016. A marked decline is observed in 2015, where the ratio dropped to 6.11%. This decline corresponds directly with the massive expansion of the asset base, as the increase in total assets outpaced the growth in net income for that fiscal year. A rapid recovery occurred in 2016, driven by a surge in net income while the asset base remained stable, leading to the highest efficiency rate of the period.
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