3. FINANCIAL RATIO ANALYSIS 3.1. PROFITABILITY (Ho, 2013) mentioned that the gross profit ratio assesses the gross profit generated per dollar sales. A drop in this ratio can signify more competition in the market, lowering selling prices or a higher cost of purchases. A rise in this ratio can signify that the firm has a competitive edge in the market and so it is able to charge higher prices for its products, or the firm is able to obtain its supplies at a lower cost.
Efficiency Ratios The efficiency ratio is used to measure how the company uses its assets and liabilities internally, these ratios to measure the performance in short term. • Accounts Receivable Turnover This ratio used to measure the firm's effectiveness in extending credit and in collecting debts. The receivables turnover ratio is an activity ratio measuring how successfully a In collecting its AR during the year, if the company has AR turnover 2 that means the AR turned over two times during the year. Accounts Receivable Turnover= Credit sales AR average (assume that 75% sales are credit) AVON= 9.1 ULTA= 41.1 REVLON= 4.12 • Fixed Asset Turnover, Reflecting how efficiently a company has used its assets to generate revenue, a higher ratio indicate of greater efficiency in managing and investing fixed-asset. Fixed Asset Turnover= Net sales/ net assets EVON= 1.63 ULTA= 1.9 REVLON= .77 • Inventory turnover Inventory turnover is a ratio showing how many times a company's inventory is replaced over a specific period of time, the higher ratio the more success is the company in selling its inventory.
The operating profit margin refers to the ratio that used to determine whether or not the business operating by the company is able to earn at a reasonable profit. The higher the ratio, the bigger amount of the money that generated by the company from it’s business to cover the costs which including fixed as well as variable. For the operating profit margin of the company, there is a slightly increase from 99.51% in 2014 to 99.69% in 2015. This shows that Nestle (Malaysia) Berhad had the bigger amount of money after deducting the costs compared to previous
) Investor’s perspective: Profitably Ratio & Market Ratio Profit Margin is a ratio that measures how much income is kept in a company as compared to the total revenue. To simply put, it is a measure of profitability. To find out how much of every Ringgit of revenue is kept in the form of profit, a firm calculates its net profit by subtracting all of its expenses including interest and tax and divides that number by total revenue. Let’s compare Apollo’s, Oriental Food and London Biscuits gross profit margin. As we can see based on graph above, Apollo and Oriental Food has the same amount of gross profit margin which is 29% where else for London Biscuit, the gross profit is only 24%.
Measuring Profitability Ratios Profitability ratios measure a company’s ability to use its assets efficiently to produce profits. These ratios provide users of financial information with useful data such as how much net income is generated from each dollar of revenue and how much net income is generated per share of stock. Return on Sales
Quick assets include those current assets that presumably can be quickly converted to cash at close to their books values. A company with a quick ratio of less than 1 cannot currently fully pay back its current liabilities. Note that inventory is excluded from the sum of assets in the quick ratio, but included in the current ratio. Ratios are tests of viability for business entities but do not give a complete picture of the business health. If a business has large amounts in Accounts Receivable which are due for payment after a long period (say 120 days), and essential business expenses and accounts payable due for immediate payment, the quick ratio may look healthy when the business is actually about to run out of cash.
So, it is not good for company AVERAGE GROSS BLOCK (%) REVENUE/AVG NET FIXED ASSETS (%) 6.29 5.32 GOOD It is said to be good because organization meets its net fixed assets with its revenue. This is nothing but finding fixed asset turnover ratio AVG TOTAL ASSETS (%) 1.24 1.24 GOOD As avg total asset ratio is maintained constant without any depreciation or decrease in its value. OPERATING REVENUE (%) 17.8 20.6 RISK Operating income is important as it is an indirect measure of efficiency. Higher the operating income more is the profit for a company. As a value got decreased company is in risk position.
So, an operating margin increasing faster than gross margin can indicate improvements in controlling operating costs, such as administrative overheads. In contrast, a declining operating profit margin could be an indicator of deteriorating control over operating costs. QP827 R Valuation Ratios: Valuation ratios have long been used in investment decision making. A well-known example is the P/E ratio- probably the most widely used indicator in discussing the value of equity securities- which relates share price to the earnings per share (EPS). The P/E ratio expresses the relationship between the price per share and the amount of earnings attributable to a single share.
Thus, it is an indicator of the net return on the average total assets of the company. FY09-FY10 FY10-FY11 FY11-FY12 FY12-FY13 FY13-FY14 FY14-FY15 ROAA 3.08% 2.79% 2.52% 2.89% 2.98% 2.82% D) The comparison of the movement of NIM, Spread and ROAA FIGURE 2 In figure 2 1) Net interest margin is showing an increasing trend. It means net income earned out of the assets or amounts lent by PFC after accounting for the cost of funds are increasing. 2) Spread of the company is also showing an increasing trend which means net interest income which a lender earns on its loan assets portfolio is also increasing. It shows how successful a firm's investment decisions are compared to its debt situations.
All three of the profitability ratios have reduced since 2010, which show that 2011 promises lesser profits than the previous year. Inventory turnover shows a slight decrease, which shows that demand for the product has comparatively decreased. Days sales inventory has increased, which shows that inventory will now change into sales much sooner than before. The fixed, current and total assets turnover have all risen as compared to the previous year 's, which shows that doing an effective job of generating sales with a relatively small amount of fixed assets, outsourcing work to avoid investing in fixed assets, and selling off excess asset capacity. A significant increase in trade receivables turnover indicates improvement in the process of cash collection on credit sales.