Enron was a large energy company that went bankrupt in 2001. The document shows that between 1994-2000, Enron's net profit grew substantially each year, reaching over $1 billion by 2000. However, in 2000 Enron's profit margins were very low, with only 6 cents of gross profit and 1 cent of net profit for every $1 of sales. Additionally, for every $1 of assets, Enron earned only 2 cents of net profit, and for every $1 invested, it earned 9 cents of net profit. This suggests Enron was profitable but had very low profitability ratios, foreshadowing its bankruptcy the following year.

1. 22.11
PROFITABILITY AND
ENRON

2. © Michael Allison, Trinity Grammar School.
Author’s permission required for external use
22.11 PROFITABILITY AND ENRON
440
489 493
105
703
893
979
-
100
200
300
400
500
600
700
800
900
1,000
1994 1995 1996 1997 1998 1999 2000
Enron Net Profit ($m)
Went bankrupt in 2001…

3. © Michael Allison, Trinity Grammar School.
Author’s permission required for external use
22.11 PROFITABILITY AND ENRON
0
10
20
30
40
50
60
70
80
90
Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Jan Feb
Year 2000 - Enron Share Price ($US)

4. © Michael Allison, Trinity Grammar School.
Author’s permission required for external use
22.11 PROFITABILITY AND ENRON
Gross Profit
Margin = 6%
Financial Year 2000
$1 of
Sales
$0.06 of
Gross Profit
$0.94 of
COGS
Income Statement For every $1 the firm generates
in sales:
• A Gross Profit of 45 cents is
earned
• Once the Cost of Goods Sold
is deducted.
For every $1 the firm generates
in sales:
• A Gross Profit of 6 cents is
earned
• Once the Cost of Goods Sold
is deducted.
For every $1 the firm generated
in sales:
• A Gross Profit of 6 cents was
earned
• Once the Cost of Goods Sold
was deducted.

5. © Michael Allison, Trinity Grammar School.
Author’s permission required for external use
22.11 PROFITABILITY AND ENRON
Financial Year 2000
Net Profit
Margin = 1%
$1 of
Sales
$0.06 of
Gross Profit
$0.94 of
COGS
Income Statement
$0.05 of
Other Exp
$0.01 of Net
Profit
For every $1 the firm
generated in sales an
overall Net Profit of 1 cent
was earned.

6. © Michael Allison, Trinity Grammar School.
Author’s permission required for external use
22.11 PROFITABILITY AND ENRON
Financial Year 2000
Return on
Assets = 2%
$0.02 of
Net Profit
For every $1 of
Assets the firm has,
the business earns a
Net Profit of 2 cents
Balance Sheet
Assets Liabilities
Owner’s
Equity
Balance Sheet
Assets Liabilities
$1 Owner’s
Equity

7. © Michael Allison, Trinity Grammar School.
Author’s permission required for external use
22.11 PROFITABILITY AND ENRON
Financial Year 2000
Return on
Investment = 9%
Balance Sheet
Assets Liabilities
Owner’s Eq.
$1
Business
$0.09 of
Net Profit
What does this mean?
For every $1 of Capital
invested by the owner,
the business earns a
Net Profit of 9 cents
Balance Sheet
Assets Liabilities
Owner’s Eq.
$1