Profitability Indicators

Profitability Indicators

Before trading a binary option based on specific stock, there are some things to consider ahead of jumping in.

Firstly, you will want to consider the relevant charts, with technical analysis showing the direction the market may move in. This should be followed by the study of any trading news for overall fundamental analysis and for further understanding of why this particular financial product / market is moving.

Here I must mention that any binary option to be traded should have a big enough expiration date in order for any fundamental factors to kick in. Markets can stay in a diverged and irrational stance more than a trader can stay solvent.

The economic calendar will be of particular use when discerning which events are approaching, as well as providing an appropriate indication of their level of importance on a grander scale. However, there is only so much information that can be ascertained from this particular trading tool. To optimally analyse your chosen asset for trade, you will want to look even closer and consider the financial situation that the company is currently in.

Profitability is of course important. Yet, most releases should be taken with a pinch of salt. For example, whilst a central bank might announce a cut in the interest rate, the following press conference could sway minds to believe that this is a positive, short-lived event and that the currency is regaining strongly.

The same can happen with company profitability reports, as earning releases are often accompanied by press conferences. Let’s say that General Electric announces a disappointing result for the quarter, with the stock price moving south. Afterwards, a press conference reveals that due to cost savings in this quarter, the profitability margin will now increase for the next three or more quarters ahead. Stock prices would now rise as investors pour in on expectations of future earnings that may beat any forecasted.

Finally, you should know that tax rates and cash availability are core matters, and for US companies this is an issue. In order to avoid larger corporate taxes, US companies are incorporating themselves overseas in fiscal paradises, or in countries with relaxed tax implications such as Ireland or Luxembourg. This means that whilst large, highly profitable companies (such as Apple for example) are sitting on a hoard of cash, these dollars are outside the US and if repatriated will be subject to 35% corporate tax. As a consequence you must think wisely when it comes to looking at companies with a bigger cash position. This doesn’t necessarily mean that the company utilises 100% of it for all operations and any earnings announcements can be downplayed by future plans.

A wise trader will understand that an instrument is subject to various influences, sometimes navigating away from where it may be predicted to trend. All in all, many profitability indicators are useful, but they should always be interpreted alongside other elements to reveal the bigger picture.