Profitability Ratio Analysis

Profitability
Profitability ratio is to measure the efficient of a business and profits generate by the business.

High selling price and reduction in operating costs could show an improvement in profitability.

There are 2 types of Profitability Ratios which will be discussed below, namely ; Gross Profit Margin and Return on Capital Employed.

Gross Profit Margin
Gross profit margin is a company's total revenue deduct its cost of goods sold divided by total sales revenue and stated as a percentage.

A company's cost of goods sold means the expense related to raw materials, labor and manufacturing fixed assets which use to generate profit.

The gross profit margin number appears as the portion of each Ringgit of sales revenue that the

The current ratio would increase if both current assets and current liabilities decreased.

Acid Test Ratio excludes inventory from calculation which may not be appropriate for business where inventory can be assessed at a marketable price easily. It should be included to achieve the liquidity position of the company.

Earning Per Share may provide incorrect information with regard to the efficient use of shareholders’ funds. Earning Per Share is calculated based on historical cost which may not be a reliable measure as Earning Per Share need to increase by at least the rate of inflation if the company is to maintain its existing operational capability.

Return on Capital Employed does not account for the depreciation and amortization of the capital employed as capital employed is in the denominator. The company’s assets are depreciated the Return on Capital Employed will increase without an increase in

Verifiability
Information must be free from error and contains quality of reliability and depended on the users to represent events faithfully. If the information is audited which mean that it can be verified and supported by evidence and users can check whether such information is faithfully represented. Timeliness
Timeliness mean information provides to investors, lenders and creditors within a reasonable time frame for the purpose of decision making by them.

Understandability
Preparation of information should be understandable by users who presumed to have sufficient knowledge of business and economic activities and willingness to study the information with reasonable diligence.

Question 5 (a)(iii) Two of four key qualitative characteristics of accounting information, namely ; Relevance and Verifiability (Reliability) which make accounting information useful for decision