Why media reports on profits annoy me a little….
Ryanair made a profit of €865 million in 2014. The Irish Times reports this figure and also notes “operating profits rose 65 per cent to €1 billion from €658 million”. Great news for Ryanair. The main reasons for increased profit seem to be a combination of lower fuel costs and increased passenger numbers. What sort of annoys me about such media reports – and all media seem to do this, not just the Irish Times – is that such reporting of numbers does not tell the full story.
Let’s take a brief look at more detail. In this example from Ryanair (or any company) on profits, we also need to consider the level of investment in assets. Forgetting about accounting for a moment, it is logical to think that if Ryanair for example acquired more aircraft, then it should be able to generate more profits due to increased passenger revenue. But, if we just make a statement like “profits rose by 65%”, this does not reveal the underlying assets.
The same Irish Times article reports that net assets (assets less liabilities) did in fact rise from €3.3 billion to €4 billion in the year. If we do a simple return on assets calculation (using operating profits), then for 2013 the return is 658/3300 = 19.9% and for 2014 it is 1000/4000, or 25%. This is a year on year increase in the return on assets of about 26%. This is a long way off the 65% reported increase in operating profit, and a lot more meaningful as it reflects the net assets (or capital) used. It is still a great improvement, but perhaps not so sensational a 65%!