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companies.19  Thus, the use of the S&P 500 companies to create benchmark ratios reflects an effort to create benchmarks based upon a broad swath of public companies.20

Given these caveats, the analysis of the financial performance of the radio industry follows.  This analysis is conducted ratio by ratio, with attention first given to ratios that focus on the operating performance of radio companies (i.e., EBIT margins and net profit margins).  Ratios that shed light on the financing of radio companies are then explored (i.e., total debt as a percentage of total capital, fixed charge coverage after taxes, market to book ratio, and stock market returns).  All charts appear at the end of this section.

4.1EBIT Margins

The earnings before interest and taxes margin (EBIT Margin) is defined as the ratio of a firm’s earnings (before subtracting out interest and taxes) to the firm’s total sales.21  As such, this ratio reflects how efficiently the firm generates profits from its sales, or alternatively stated, how well the firm minimizes the operating, personnel and administrative costs of its operations, for a given level of sales.  The ratio represents the "gross profit margin" of a company, that is, before netting interest expenses and taxes.  Chart V shows median EBIT margins for the publicly-traded radio companies (black bars) and for the S&P 500 companies (grey bars).  

Chart V indicates that the quarterly gross profit margins of the publicly-traded radio broadcast companies have been greater than the gross profit margins of the S&P 500 companies in 13 out of the last 17 quarters.  As well, the gross margins of the radio companies appear to show a strong seasonality, with gross margins generally highest during the second and third quarters of the year.  Overall, the gross profit margins of the radio companies have shown very strong performance, in comparison with the S&P 500 companies, both since the passage of the Telecom Act at the end of the first quarter of 1996, and when the comparison is made with the

19 Because financial ratios are typically ratios of dollars, they are unitless and are difficult to interpret except in comparison to some benchmark ratio.  Consequently the choice of a benchmark is an important choice in financial analysis.

20 Typically when analysts refer to movements in the stock market, they use information on movement in the stock prices of the S&P 500 companies.  Thus, the S&P 500 represent firms doing business in just about every segment of private enterprise.

21 Compustat calculates the EBIT margin as (((sales + other income) – (cost of goods sold + selling, general, and administrative expense + depreciation and amortization))/(sales + other income))*100.


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