Profitability Ratios

Profitability ratios measure a companys ability to generate earnings relative to sales, assets and equity. These ratios assess the ability of a company to generate earnings, profits and cash flows relative to relative to some metric, often the amount of money invested. They highlight how effectively the profitability of a company is being managed. Common examples of profitability ratios include return on sales, return on investment, return on equity, return on capital employed (ROCE), cash return on capital invested (CROCI), gross profit margin and net profit margin. All of these ratios indicate how well a company is performing at generating profits or revenues relative to a certain metric. Different profitability ratios provide different useful insights into the financial health and performance of a company.

1. Return on sales (ROS) (operating margin)= EBIT / Revenue = ( PBPT net of P&E&OI / Total Income )

2. Return on Investment (ROI)= Net profit after interest and tax / Net worth = (PAT net of P&E / Net worth ) 3. Return on Equity(ROE) = Net income after tax / Shareholder's equity = (PAT net of P&E / Net worth ) 4. Gross profit margin = Gross profit / Revenue = ( PBT / Total Revnue) 5. Net profit margin = Profit (after tax) / Revenue = (Profit after tax / Total Revnue )

Ratios Operatingprofit margin Gross profit margin Net profit margin

2010 28.08 22.56 15.30

2011 19.33 13.53 10.43

2012 22.47 17.53 13.30

70 60 50 40 30 20 10 0 2010 2011 2012

Net profit margin Gross profit margin Operating profit margin

Liquidity ratios

Liquidity ratios are the ratios that measure the ability of a company to meet its short term debt obligations. These ratios measure the ability of a company to pay off its short-term liabilities when they fall due. The liquidity ratios are a result of dividing cash and other liquid assets by the short term borrowings and current liabilities. They show the number of times the short term debt obligations are covered by the cash and liquid assets. If the value is greater than 1, it means the short term obligations are fully covered. Most common examples of liquidity ratios include current ratio, acid test ratio (also known as quick ratio), cash ratio and working capital ratio.

1. Cash Ratio Cash ratio = Cash and cash equivalents / Current Liabilities 2. Current Ratio current ratio = Current Assets / Current Liabilities 3. Acid-test/quick ratio Quick ratio = (Current Assets Inventory) / Current liabilities

Ratio Current ratio Quick ratio Cash ratio

2010 0.67 0.30 20.43

2011 0.67 0.34 14.94

2012 0.67 0.36 16.56

140 120 100 80 60 40 20 0 2010 2011 2012

Cash ratio Quick ratio Current ratio

Activity Ratios
Activity ratios, sometimes referred to as operating ratios or management ratios, measure the efficiency with which a business uses its assets, such as inventories, accounts receivable, and fixed (or capital) assets. The more commonly used operating ratios are the average collection period, the inventory turnover, the fixed assets turnover, and the total assets turnover.

1. Asset Turnover = Sales Revnue / Total asset 2. Inventory Turnover Ratio = ( Sales / Inventory ) 3. Average collection Period = Accounts Recievable / (Annual Credit Sales /365)

Ratio Inventory ratio turnover

2010

2011

2012

22.65 35.04 1.18

17.69 32.28 1.26

15.73 26.71 1.16

Debtors turnover ratio Asset turnover ratio

70 60 50 40 30 20 10 0 2010 2011 2012

Asset turnover ratio Debtors turnover ratio Inventory turnover ratio

Leverage Ratios
The ratios used to determine about the companies financing methods, or the ability to meet the obligations. There are many ratios to calculate leverage but the important factors include debt, interest expenses, equity and assets. 1.Debt-Equity Ratio Debt-to-equity ratio = Liabilities / Equity 2. Interest Coverage Ratio Interest Coverage = Operating Income / Interest Expenses 3.Fixed Assets to Net worth = Fixed Assets / Net worth

Ratio

2010

2011

2012

Debt equity ratio

0.35

0.39

0.30

Interest cover

14.97

7.53

14.85

Total debt to Owners fund 0.35 0.39 0.30

50 45 40 35 30 Total debt to owners fund 25 20 15 10 5 0 2010 2011 2012 Interest cover Debt equity ratio