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Pre-Depreciation Profitability Margin

Source: R/get-profit-margin-predepr.R
get_profit_margin_predepr.Rd

Operating surplus or deficit as a share of total revenue, before depreciation.

Formula:

predpm = ( total_revenue - ( total_expenses - depreciation ) ) / total_revenue

Definitional Range

Bounded above at 1.0; unbounded below. Always equal to or greater than the post-depreciation margin (get_profit_margin_postdepr()) since adding back depreciation can only increase the margin. The typical range is approximately [-0.20, 0.40].

Benchmarks and rules of thumb

  • A pre-depreciation margin above zero with a post-depreciation margin below zero is common and generally manageable for capital-intensive nonprofits.

  • If both margins are negative, the organization is generating a true cash flow deficit, not just an accounting loss.

Calculated For: 990 filers only.

Usage

get_profit_margin_predepr( df,
  revenue      = "F9_08_REV_TOT_TOT",
  expenses     = "F9_09_EXP_TOT_TOT",
  depreciation = "F9_09_EXP_DEPREC_TOT",
  numerator = NULL, denominator = NULL, winsorize = 0.98 ,
  range     = "np",
  sanitize  = TRUE,
  summarize = FALSE )

Arguments

df

A data.frame containing the fields required for computing the metric.

revenue

Total revenue.

expenses

Total functional expenses.

depreciation

Depreciation, depletion, and amortization.

numerator

Optional. A pre-calculated column for the numerator (revenue minus non-depreciation expenses). Cannot be combined with revenue, expenses, or depreciation.

denominator

Optional. A pre-calculated column for the denominator. Cannot be combined with revenue.

winsorize

The winsorization value (between 0 and 1), defaults to 0.98, which winsorizes at the 1st and 99th percentiles.

range

Character string specifying the theoretical range of the ratio, used to set winsorization bounds. Default "np". Options: "np" (negative to positive), "zp" (zero to positive), "zo" (zero to one), "nz" (negative to zero), or a custom "lo;hi" pair (e.g. "0;10").

sanitize

Logical (default TRUE). If TRUE, NA values in the financial input columns are imputed to zero before the ratio is computed, respecting form scope: Part X and VIII/IX fields (990 only) are imputed only for 990 filers; Part I summary fields (990 + 990EZ) are imputed for all filers. The returned dataframe always contains the original unmodified input columns.

summarize

Logical. If TRUE, prints a summary() of the results and plots density curves for all four output columns (raw, winsorized, z-score, percentile). Defaults to FALSE.

Value

Object of class data.frame: the original dataframe appended with four new columns:

- `profit_predepr`   - pre-depreciation profitability margin (raw)
- `profit_predepr_w` - winsorized version
- `profit_predepr_z` - standardized z-score (based on winsorized values)
- `profit_predepr_p` - percentile rank (1-100)

Details

Primary uses and key insights

The pre-depreciation profit margin approximates cash flow from operations by adding back non-cash depreciation charges to the surplus. Since depreciation is an accounting allocation of past capital expenditure rather than a current cash outflow, this measure better reflects the organization's actual cash-generating ability. A positive pre-depreciation margin alongside a negative post-depreciation margin indicates the organization is cash-flow positive but "booking" a loss due to large depreciation charges.

Formula variations and their sources

(Total revenue - (Total expenses - Depreciation)) / Total revenue. Equivalently, (revenue - expenses + depreciation) / revenue. This is the simplest cash flow approximation available from 990 data; it does not account for changes in working capital, capital expenditures, or debt service, which are not directly reported on the 990.

The EBITDA margin used in commercial analysis is similar in spirit but also adds back interest, taxes, and amortization. The pre-depreciation margin here adds only depreciation (and amortization where included), making it a more conservative approximation.

Canonical citations

  • Keating, E.K., Fischer, M., Gordon, T.P. & Greenlee, J. (2005). Assessing financial vulnerability in the nonprofit sector. Harvard Business School Working Paper 04-016.

  • Zietlow, J., Hankin, J.A. & Seidner, A. (2007). Financial Management for Nonprofit Organizations. Wiley.

Variables used:

  • F9_08_REV_TOT_TOT: Total revenue (revenue)

  • F9_09_EXP_TOT_TOT: Total functional expenses (expenses)

  • F9_09_EXP_DEPREC_TOT: Depreciation and amortization (depreciation)

Examples

library( fiscal )
data( dat10k )

d <- get_profit_margin_predepr( df = dat10k )
#>    :: Revenue equal to zero :: 74 case(s) replaced with NaN
head( d[ , c( "profit_predepr", "profit_predepr_w", "profit_predepr_z", "profit_predepr_p" ) ] )
#>    profit_predepr profit_predepr_w profit_predepr_z profit_predepr_p
#>             <num>            <num>            <num>            <int>
#> 1:             NA               NA               NA               NA
#> 2:     0.06874629       0.06874629       -0.3406080               37
#> 3:     0.08823583       0.08823583       -0.2366198               41
#> 4:             NA               NA               NA               NA
#> 5:     0.59547236       0.59547236        1.3765920               91
#> 6:             NA               NA               NA               NA