Profits And Dividends As Measures Of Business Success?

A business is conceived with a 'going concern', i.e. it is intended to be continued on into the foreseeable future (either in its current form or another). During its existence either as sole proprietorship, partnership or as a corporation with managers responsible for managing its operations, these managers' primary aim is to maximise the wealth of the owners or shareholders as well as ensuring the viability of the business into the foreseeable future.

In a corporation, the simplest and best measure of shareholders’ (owners’) wealth is the firm's share price. While it may seem intuitive that maximising a firm’s share price is equivalent to maximising its profits, this view is not always correct. Corporations commonly measure profits in terms of earnings per share (EPS), which represent the amount earned during the specific financial report period on behalf of each outstanding share of common stock. EPS are calculated by dividing the period’s total earnings available for the firm’s common shareholders by the number of shares of common stock outstanding. EPS therefore reflects a true measure of the business owners’ wealth.

Ownership of a business has two categories: stakeholders and shareholders. Stakeholders may have shares (but under 100%) and who have an interest in the business. Also stakeholders are those whose interests hinge on the business being profitable, e.g. employees of an organization are stakeholders who will continue to be paid if the business remains profitable and operational. Shareholders on the other hand own 100% of the shares and are both stakeholders as well. Stakeholders have short-term time horizon interest while shareholders will (and should) have longer-term time horizon direction and interest.

Over specified financial time horizons or periods, profit is a predominant measure of a business's performance and profit is often used as a short-interval-control measure to reset the direction of the business towards its strategic objectives: extend and defend core business; build emerging businesses; and create viable options. Profit falls under the 'profitability' class of financial ratios. Owners, creditors and management pay close attention to boosting profits because of the great importance the market places on earnings.

But what if 'time series' analysis shows dwindling profits as well as reductions in EPS over time? Is it worth spending money and making profits only to incur a decline in business value over time??

Yearly profits tend to give a sense of business success but a trend of the 'profit-margin' over some years will give the true measure of whether economic value has been added to the shareholder's equity or not. Besides there are many other ways a company's holistic overall financial performance over a specified period can be assessed as given by the spectrum of financial ratios in these categories: liquidity, activity, debt, profitability and market.

The table below shows the consolidated summary analysis of the holistic spectrum of financial ratios from OTML’s audited Annual Financial Statements of 2018 through to 2021. Here you can now see the trend lines of the financial ratios at the end of this four-year period where most are trending negatively.

Hardcore investors who want to become shareholders and want to buy into the firm (if it is publicly listed) will usually look at these financial ratio trends to make a gamble or take a risk with their investment and I am sure they will be paying attention to the holistic spectrum of these financial ratios over time to determine if the business is growing in value (i.e. EPS or Return on Owner's Equity - ROE) or not and that they believe they can 'takeover' and enhance the trouble firm's value by restructuring its management, operations and financing to improve its value and profit from it. Declining EPS, ROE and other financial ratios that are holistically used to assess the financial health of the organisation will become red flags for serious investors as well as provides opportunity for cheap aggressive takeovers based on low price earnings (P/E) ratios that will force the owner to sell cheaply. As citizen shareholders of OTML through our GoPNG, we should also think long term direction and be critical about our holistic business results as well as how the profits are being made.

People may argue that the bottom line is that OTML is still making profits and that is what should matter. There is no doubting that from an individual perspective as stakeholders: from employees up to members of the BOD and Management and MPs and PM, we are all happy about this result from our mining company, our OTML. But putting on the hat of the shareholder, and removing all emotional attachments to the business, we should note that any business is conceived as an entity that is independent from its owners and has a 'going concern'. Yes, detaching the owner from the business is not an easy concept to grasp. But this mental shift is necessary to realise, as a strict business entity, the primary goal of OTML as well as those in charge of managing its operations, is to maximise the wealth of PNG and PNGns during the LOM (life of mine).

The declining profit margins (from the trends in the table above) is interpreted as: unit costs are on the rise and the profits are dropping. For the period of assessment, we can say that OTML, from the basic economics of the firms perspective, must work harder to regain its status among GoPNG’s SOE portfolios as the ‘Milking Cow’ since it is approaching the ‘Panting Dog’ criteria.

The conclusion is that a company can make profit year-in and year-out, but, what is the economic state and the future holistic financial trends of our 'Goose That Lay The Golden Egg'? as in EPS and ROE as well as other financial ratios over a specific financial reporting period should also be examined in a time-series assessment together with profits and dividends to get a holistic economic state and financial health of the organisation to make decisions to bring the organisation forward into the future.