Finance analysis

Finance analysis

Finance analysis

Profitability ratios

Profitability Ratios show how successul a company is in terms of generating returns or profits on the Investment that it has made in the business. If a business is Liquid and Efficient it should also be Profitable. Profitability is the ability of a business to earn profit over a period of time. Although the profit figure is the starting point for any calculation of cash flow, as already pointed out, profitable companies can still fail for a lack of cash. Profitability is a result of a larger number of policies and decisions. The profitability ratios show the combined effects of liquidity, asset management (activity) and debt management (gearing) on operating results. The overall measure of success of a business is the profitability which results from the effective use of its resources. Profitability ratios are the indicators of the success or failure of the firms' activities.

The profit margin shows the relationship between net income (profit) and sales. This interactive tutorial explains the concept by walking you through the calculations, including where to find the numbers on the income statement.

Profit margin= net income (profit)/ Sales

2008

Profit margin= net income (profit)/ Sales

Profit Margin= 552 / 21015

Profit Margin= 0.02627

2007

Profit margin= net income (profit)/ Sales

Profit Margin= 836 /27450

Profit Margin=

0.030455

2006

Profit margin= net income (profit)/ Sales

Profit Margin= 944/ 21900

Profit Margin=

0.04311

Interpretation

From the given ratios, it can be seen that the profitability of the company is going to be increased during the three years. Increased earnings are good, but an increase does not mean that the profit margin of a company is improving. If a company has costs that have increased at a greater rate than sales, it leads to a lower profit margin. This is an indication that costs need to be under better control.

ROCE

Return on Capital Employed (ROCE) is used in finance as a measure of the returns that a company is realising from its capital employed. It is commonly used as a measure for comparing the performance between businesses and for assessing whether a business generates enough returns to pay for its cost of capital.

ROCE=    Profit before Interest and Taxation   Capital Employed

2008

ROCE= 1443/ 4940

ROCE= 0.02915

2007

ROCE= 1859 /4508

ROCE= 0.412378

2006

ROCE= 2235/4099

ROCE=

0.545255

Interpretation

ROCE doesn't just gauge profitability as profit margin ratios do, it measures profitability after factoring in the amount of capital used. The high ROCE indicates that a larger chunk of profits can be invested back into the company for the benefit of shareholders. The reinvested capital is employed again at a higher rate of return, which helps to produce higher earnings-per-share growth. A high ROCE is, therefore, a sign of a successful growth company.

Leverage

In finance, leverage or leveraging refers to the use of debt to supplement investment. Companies usually leverage to increase returns to stock, as this practice can maximize gains (and losses).

Leverage Ratio = Short Term Debt + Long Term Debt Total Shareholders

2008

Leverage Ratio = 8456 /4940

Leverage Ratio= 1.711741

2007

Leverage Ratio = 7609/4508

Leverage Ratio= 1.687888

2006

Leverage Ratio = 3695/4099

Leverage Ratio = 0.901439

Interpretation

Companies with high fixed costs, after reaching the breakeven ...