SAP is the world’s leading supplier of business software, and the world’s third-largest independent software company, with over 19,300 customers, 10 million users, 60,100 installations, and 30,000 employees worldwide. The company consists of SAP AG and its network of 91 operating subsidiaries and has a presence or a representation in more than 120 countries. With annual revenues of more than $7 billion, the company provides industry and cross-industry solutions, services and infrastructures, along with related consulting, education, and support services, and has a dominant 35% market share in the global software industry1. The SAP solutions improve virtually every aspect of business, government, and education. What is more, these solutions are tailored to meet the specific requirements of 23 different industry categories, giving SAP a competitive advantage that no other company can match.
2. Executive Summary
This study uses ratio analysis to work out how profitable SAP is during the last five years (1999 – 2003) and also compared to the figures of some of the main competitors and of the software industry as a whole. The study aims to answer the following questions: 1. Has SAP made a good profit compared to its turnover? 2. Compared to its assets and capital employed, has SAP AG made a good profit? First, a brief analysis of the company’s operations and resource effectiveness is done by reviewing the income statement and the balance sheet. Then, selected combinations of ratios are used to illustrate the trends and patterns of the changes in profitability over the last 5 years. The profitability ratios implied use margin analysis and show the return on sales and capital employed.
Further, the profitability trends for SAP for the last years are compared to the same period for Oracle and Siebel, which are one of the main SAP competitors. These data is then compared to the trend for the whole software industry during this period. The data used in the study is taken from the annual reports of the three companies, as well as from the Reuters software industry statistics. The theoretical background is based on the “Principles of Managerial Finance” textbook.
Income Statement and Balance Sheet Analysis
This part of the study tries to provide an overall picture of the key figures in the income statement and in the balance sheet for the monitored period that are further used in the financial ratio analysis and in the cross-section analysis. The Income Statement SAP’s total revenue indicates a stable increase during the last 5 years to reach $8,8 billion in fiscal year 2003. The revenue is presented in US dollars, as the comparable data of the competitors and of the whole industry is also presented in US dollars. Otherwise, if euro is used as a currency, SAP demonstrates a slight decrease in its profits during the 2003 fiscal year as a result of the foreign exchange effects.
Total Revenue, Operating Income and Total Operating Expenses During the monitored period SAP is continuously focused on managing costs and realizing efficiency potential to improve profitability from operations. As can be seen from the graphic above, the company constantly increases the distance between the Total operating expenses and the Total revenue. The strict cost savings enabled SAP to achieve an operating income of $2,2 billion for 2003, 6 % more than for 2002. As a result of the constantly increasing operating income and of the significantly reduced losses from minority investments the company encounters an increase in the Income before income taxes, which for 2003 rose 60 %, compared to 2002, to reach $2,238 million.
Earnings Per Share (EPS)
Another important value for analyzing SAP’s profitability is the EPS, which is the amount of profit that has on average been earned by each share. More precisely, it is the level of net profit that is used to calculate the earnings per share, and any profit owed to preference shareholders or minority interests is taken off first. In other words, the level of profit used is that profit that actually belongs to the ordinary shareholders.