News

EUR/USD and USD/JPY have pulled right back:

The news earlier ICYMI:

• Trump said had no intention of firing Fed Chair Powell (he did). Major reversal from Trump

• Trump backing away from tariffs, backing away from firing Powell – will it last?
• Trump says he has no plans to Fire Federal Reserve Chair Powell
• Trump says he is going to be very nice to China, they have to make a deal

Equity index trade on Globex is holding better after its gap higher:

This article was written by Eamonn Sheridan at www.forexlive.com.

Understanding Profitability Ratios And What They Can Tell Investors

Profitability ratios are among the most commonly cited tools in fundamental analysis. But beyond the numbers, these ratios tell powerful stories about a company’s strategy, efficiency, scalability, and ability to compete. In this guide, we’ll unpack the most important profitability ratios, how to interpret them in different market cycles, and what to watch out for when comparing companies across sectors.

What Are Profitability Ratios?

Profitability ratios measure a company’s ability to generate income relative to revenue, assets, equity, or capital employed. They offer insights into how well a company manages its costs and turns resources into profits.

Core Profitability Ratios Explained

1. Gross Profit Margin

Formula: Gross Profit / Revenue
Tells you: How efficiently a company produces its goods/services before overhead.

• High Margin: Strong pricing power or efficient production

• Low Margin: Price competition, high input costs, or poor supply chain management

Example: Apple may report >40% gross margin, while a grocery retailer like Kroger may operate at <25% due to slim markups.

2. Operating Profit Margin (EBIT Margin)

Formula: Operating Income / Revenue
Tells you: Core profitability after accounting for SG&A and R&D

• Improving margin may reflect scaling benefits

• Watch for large jumps—could be due to temporary cost cuts

Example: Meta Platforms’ operating margin surged post cost restructuring in 2023.

3. Net Profit Margin

Formula: Net Income / Revenue
Tells you: What percentage of revenue becomes bottom-line profit

• Includes taxes, interest, one-off items

• Often used to compare companies across sectors

Example: A software company may post 25%+ net margin, while an airline might operate with <5% due to capital intensity.

4. Return on Assets (ROA)

Formula: Net Income / Total Assets
Tells you: How efficiently a company uses its assets to generate profit

• Useful for asset-heavy industries like manufacturing, telecom

• Look at long-term trends

Example: ROA for a real estate REIT may look lower than a cloud software firm but could still be attractive within its sector.

5. Return on Equity (ROE)

Formula: Net Income / Shareholders’ Equity
Tells you: How effectively the company uses equity capital

• High ROE is desirable, but extremely high ROE can result from low equity (high leverage)

• Compare within the same industry

Example: Banks often report high ROE due to leverage; tech firms may have lower but consistent ROE over time.

6. Return on Invested Capital (ROIC)

Formula: NOPAT / Invested Capital
Tells you: How much profit a company earns on capital deployed from both debt and equity

• Arguably the most important long-term value creation metric

• Must exceed the company’s weighted average cost of capital (WACC) to generate shareholder value

Example: Industrial giants like 3M or Honeywell focus on consistent ROIC above 10%.

Applying Ratios in Market Context

📈 Bull Market

• Investors reward expanding margins and high ROE, especially when backed by revenue growth.

• Scalable business models with rising profitability are favored.

• Tech and consumer discretionary sectors often shine.

📉 Bear Market

• Focus shifts to stable or resilient margins.

• High ROA/ROIC can suggest capital discipline.

• Profitability may matter more than growth in defensive sectors (healthcare, staples).

✨ Recovery/Transition Market

• Watch for margin inflection points as demand returns.

• ROIC and ROA often lead price recovery before headline earnings.

Ratio Benchmarks and Sector Differences

Note: Always benchmark against direct peers within the same industry.

Red Flags in Profitability Ratios

• Sudden margin expansion not supported by revenue growth

• High ROE with low ROA (may signal excessive leverage)

• Negative or declining ROIC in growth companies

• Rising SG&A as % of revenue with flat or falling margins

• Aggressive cost cuts that improve margins temporarily but hurt long-term competitiveness

Case Study: Comparing Two Companies

Company A (Cloud SaaS)

• Gross Margin: 80%

• Operating Margin: 25%

• Net Margin: 20%

• ROA: 15%

• ROE: 18%

• ROIC: 20%

Company B (Airline)

• Gross Margin: 30%

• Operating Margin: 8%

• Net Margin: 4%

• ROA: 3%

• ROE: 12%

• ROIC: 5%

Both may be solid in their own sector—but if investing in a bear market, the SaaS firm’s high margins and ROIC may offer more resilience.

Pro Tips for Interpreting Profitability Metrics

• Pair margins with revenue growth to gauge scalability

• Watch trendlines, not just single values

• Adjust for one-off gains or losses (e.g., asset sales)

• Cross-check with cash flow to validate earnings quality

Remember the Ratios. And Remember our Next Name.

We at ForexLive.com (evolving to investingLive.com later this year) are continuing to educate investors. In this case, understanding profitability ratios gives investors a lens into efficiency, durability, and long-term value creation. Each number must be viewed in context—both against competitors and through the lens of the current market regime.

Numbers don’t lie—but they do require interpretation. That’s the edge professional investors develop.

This article was written by Itai Levitan at www.forexlive.com.

The NZD/USD pair gathers strength to around 0.5980 during the Asian trading hours on Wednesday. The New Zealand Dollar (NZD) has risen to its highest level since early November 2024 against the US Dollar (USD) after the optimistic comments from the US Treasury Secretary Scott Bessent.

The Australian Dollar (AUD) recovered some ground on Wednesday, retracing its losses from the previous session.

The times listed below are in GMT/US Eastern time format:

• 0600/0200 The governor of the Bank of England, Andrew Bailey, the chief economist of the European Central Bank, Philip Lane scheduled
• 1030/0630 Bank of England Chief Economist Huw Pill speaks at the Leeds University Business School
• 1630/1230 Bank of England Governor Andrew Bailey speaks at a lunch hosted by the Institute of International Finance
• 1800/1400 Bank of England Deputy Governor Sarah Breeden speaks on “Monetary Policy and Financial Stability in Inflationary Times”

This article was written by Eamonn Sheridan at www.forexlive.com.

How to Link the Three Important Financial Statements: A Practical Guide for Investors

Once you understand the balance sheet, income statement, and cash flow statement individually, the next step is learning how to link them together. This is where true financial analysis begins. Linking the statements provides a full picture of a company’s performance, efficiency, and sustainability. It also ensures consistency in your analysis and helps detect red flags early.

In this guide, we walk through how these three core statements connect and show examples to illustrate the cause-and-effect relationships between them.

Why Link Financial Statements?

• Holistic Analysis: You see not just profit, but cash generation and financial structure.

• Error Detection: Inconsistencies may expose accounting red flags.

• Forecasting: Accurate models require linked statements to simulate scenarios.

• Investor Insight: Linking shows whether net income is backed by cash and sustainable.

Core Relationship: Flow vs. Stock

• Income Statement: Measures flows over a period (revenue, expenses, net income)

• Cash Flow Statement: Measures cash inflows/outflows during the same period

• Balance Sheet: Shows stock (the cumulative position) at a point in time

Each statement feeds into and updates the others. Here’s how:

1. Linking the Income Statement to the Balance Sheet

• Net Income → Retained Earnings

  • Net income from the income statement flows into retained earnings on the balance sheet.

  • If dividends are paid, they reduce retained earnings.

• Depreciation (Non-Cash) → Accumulated Depreciation (PP&E)

  • Recorded as an expense on the income statement but added to accumulated depreciation on the balance sheet.

• Interest Expense → Debt

  • Paid interest reduces net income; unpaid interest increases liabilities.

• Taxes → Tax Payable

  • Accrued but unpaid taxes create tax liabilities.

2. Linking the Income Statement to the Cash Flow Statement

• Net Income is the first line of the cash flow from operating activities (indirect method).

• Non-Cash Items (like depreciation and amortization) are added back to reconcile net income with actual cash flow.

• Changes in Working Capital (A/R, inventory, A/P) from the balance sheet adjust net income.

Example:
If A/R increases, it means more revenue was booked but not yet collected in cash → cash flow decreases.

3. Linking the Cash Flow Statement to the Balance Sheet

• Ending Cash Balance from the cash flow statement updates the cash position on the balance sheet.

• Capital Expenditures in investing activities reduce cash and increase PP&E.

• Debt Issuance or Repayment in financing activities changes the liabilities section.

• Stock Issuance or Repurchase impacts both cash and equity.

Walkthrough Example: Tech Company Expansion

Income Statement Highlights

• Revenue: $1B

• Net Income: $100M

• Depreciation: $25M

• Interest Expense: $10M

• Tax: $20M

Balance Sheet Changes

• Cash: -$50M

• PP&E: +$60M

• Debt: +$30M

• Retained Earnings: +$80M (Net income $100M – Dividends $20M)

Cash Flow Statement

• Operating CF: $120M (Net income + depreciation – working capital changes)

• Investing CF: -$70M (CapEx)

• Financing CF: -$100M (debt repayment + dividends)

• Net Change in Cash: -$50M

Everything connects. Net income raised retained earnings. CapEx increased PP&E. Dividends and debt repayment used up cash.

Summary of Key Links

Market Context: Why Linking Matters Even More Now

📈 Bull Market

• Analysts may focus more on income statements and ignore working capital or CapEx unless statements are linked.

• Linking helps reveal overaggressive earnings that are not backed by cash.

📉 Bear Market

• Cash is king. Linked analysis confirms whether reported earnings are turning into actual liquidity.

• Helps validate if dividends or buybacks are sustainable.

✨ Transition or Recovery Phases

• Linking identifies early signs of turnaround: rising operating cash flow alongside income stabilization.

• Balance sheet improvements (debt paydowns) show up only when all statements are viewed together.

Advanced Tips for Real-World Analysis

• Build a 3-statement model in Excel to simulate scenarios (e.g., drop in revenue, rising debt costs)

• Use Cash Conversion Ratio = Operating Cash Flow / Net Income to assess earnings quality

• Check for alignment: are profitable firms building cash or just growing receivables?

• Review notes for non-cash adjustments: impairments, lease obligations, deferred revenues

We at ForexLive.com (evolving to investingLive.com later this year) are continuing to educate investors. In this case, linking the financial statements is essential for serious investing. Each report is powerful alone, but their combined story reveals the truth about a company’s health, resilience, and future potential.

When investors understand how money flows through a business—from revenue to reinvestment to liquidity—they gain a durable edge in analyzing and forecasting performance.

This article was written by Itai Levitan at www.forexlive.com.

On Wednesday, the People’s Bank of China (PBOC) set the USD/CNY central rate for the trading session ahead at 7.2116 as compared to the previous day’s fix of 7.2074.