Even a financial ratio analysis is made for measuring SAP’s profitability, it still cannot be said whether a gross profit margin of about 16% on average for the last 5 years is good or bad, whether the net profit margin of around 12% is good or bad, etc. What is missing in order to tell whether ratio result is good are the ratio values for other businesses in the same industry and of the industry as a whole, a process which is wide-known as a cross-section analysis.
The cross-section analysis first compares the values of the SAP profitability ratios calculated above to the corresponding values for the same period for Oracle and Siebel, one of the main SAP competitors. Then average values of the profitability ratios are calculated for the past 5 years both for SAP and for its competitors and are compared to the average values of the software industry for this period as a whole. This is the best way to determine the current position of SAP, in relation to profitability, among its main competitors and among the whole industry.
Gross Profit Margin
On the basis of this data it can be said that even SAP has a stable and constantly growing gross profit margin, it still cannot manage its effectiveness very well compared to its main competitor Oracle which has almost twice higher gross profit margin. That is, Oracle is nearly two times more efficient in its software development, distribution, training, and consulting processes. The same can be Stated for Siebel, which however experiences some problems in 2003.
Net Profit Margin
Moving on to the net profit margin it becomes evident that Siebel is experiencing severe problems handling its costs, which leads to almost no net profit in 2002 and 2003. SAP, Oracle and Siebel have almost equal net profit margins in 1999, but as the Siebel ratio is going down, the one of Oracle is heading up. In 2000 Oracle has almost 3 times higher net profit margin, which however is not so strange when the company Income statement is checked. It becomes evident that the company has realized almost $7 billion net investment gains related to marketable securities. For the years between 2001 and 2003 Oracle keeps a very high and almost constant net profit margin, which is two times higher than the one of SAP. However, in 2003 SAP has a significant increase in its net profit margin, but the company is still far behind Oracle in managing all its costs and expenses.
Operating Profit Margin
Compared to Oracle and Siebel SAP has a very stable and constantly growing operating profit ratio, that is, SAP improves its efficiency every year, which is not the case with Oracle and Siebel. Siebel is almost making losses and Oracle has a tremendous 22% decrease in 2002 and stays in the same position in 2003. Meanwhile, SAP is continuing to generate more and more money from its own operations.
Return on Total Assets (ROA)
Comparing the above data SAP realizes a growth in its ROA ratio and is currently very close to the Oracle’s ROA ratio. Oracle from the other side is demonstrating a very high effectiveness in making profits from its available assets. It can be stated that Oracle is less asset-intensive, and as SAP is approaching the Oracle’s values it can be suggested that SAP is also quite less asset-intensive.
Return on Equity – ROE
Again Oracle is the absolute leader between the 3 companies, but it can be seen that it has a very fluctuating trend which is constantly decreasing the last several years. SAP on the contrary has quite a stable trend of its ROE ratio and is constantly increasing it to reach to an 11% difference between its value and Oracle. However, 11% is still a very big difference which shows that Oracle is more profitable than SAP in comparison to the total amount of shareholder equity.
Software Industry Comparison
The comparison is done on the basis of the average values of the ratios during the monitored period: On the basis of the above data it can be said that SAP has a strong position in the global software industry and is constantly improving its financial parameters. What waits still to be done is for the company to exercise a stronger control on its expenses in order to increase the value of its net profit ratio, which is still far behind the average ratio for the industry. However, compared to Oracle, SAP has still a lot to do all over its financial landscape in order to reach the Oracle’s profitability.
After a closer look to the above data it can be stated that Oracle is one of the software industry leaders in terms of profitability. Its average operating margin ratio is higher than the industry’s average, which means the company tends to have lower fixed costs and a better gross margin, which gives its management more flexibility in determining prices. This pricing flexibility provides an added measure of safety during tough economic times.