Government Contracting:

Financial Measures for Evaluating Contractor Profitability

NSIAD-90-200BR: Published: Sep 12, 1990. Publicly Released: Sep 12, 1990.

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Pursuant to a congressional request, GAO provided information on the types of financial measures that could be used to assess the effect that federal government policies may have on the profitability of government contractors.

GAO found that: (1) the price earnings ratio was not an appropriate indicator of profitability for government contractors, since it was better suited for measuring stock market expectations than current profitability; (2) the return on assets ratio was a more desirable measure of profitability since it could provide a basis for measuring the impact of policies, be computed at the segment level, and be derived from historical financial data which could be audited; and (3) while not suitable as overall profitability measures, such financial measures as capital expenditures ratios, research and development ratios, liquidity ratios, and debt management ratios could be used to provide additional insight into the effect of individual government policies.

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