The Major Profitability Ratios
The major profitability ratios are:
1.1.1.1 RETURN ON CAPITAL:
Describes the earning capacity of the enterprise and it is measured by the following ratio:
Profit before interest and taxation
Average operating Assets
The Return On Capital ratio measures how well the average operating assets (assets such as debtors, cash, fixed assets, stock) are generating the company s income, and is indicative of the management techniques applied by the company to utilise its assets.
A poor income rate of return could indicate that valuable assets are under utilised. As a result of this problem, an enterprise, which shows a negative Return on capital could be under the influence of poor management.
The earning capacity of XYZ Limited for 1998 and 1999
|Ratio|2000|1999|1998|Comments|
||||||
Return on||||||
Capital|NPBT|100|88|70||
|Av. OA|(286 + 230) ?2|(230 + 162) ?2|(162 + 144)|Industry ave|
||100 x 100|88 x 100|?2||
||258|196|70 x 100||
||38, 76%|44, 9%|153||
||||45.7%||
||||||
I N T E R P R E T A T I O N :
XYZ Limited s return on capital declined from
45.7% in 1998 to 44.9% in 1999. This decrease is mainly due to the increase in assets, but further investigation is required to analyse the extent of this decrease.
The decrease continued further from 44.9% in 1999 to 38.76% in 2000. Again this decrease is due to an increase in assets. The question that arises therefor is: “Is this phenomena as a result of mismanagement of assets, or just because
XYZ Limited is starting up and still growing?”
Additional investigation would be required to analyse the extent of the decrease.
1.1.1.2 NET PROFIT RATIO:
The primary objective of an enterprise is to make a profit. Profit is earned from sales and serves as an important measure of return of capital.
The Net Profit percentage can be measured by the following ratio:
Net Profit
Sales
This Net Profit Ratio
1.1.1.1 RETURN ON CAPITAL:
Describes the earning capacity of the enterprise and it is measured by the following ratio:
Profit before interest and taxation
Average operating Assets
The Return On Capital ratio measures how well the average operating assets (assets such as debtors, cash, fixed assets, stock) are generating the company s income, and is indicative of the management techniques applied by the company to utilise its assets.
A poor income rate of return could indicate that valuable assets are under utilised. As a result of this problem, an enterprise, which shows a negative Return on capital could be under the influence of poor management.
The earning capacity of XYZ Limited for 1998 and 1999
|Ratio|2000|1999|1998|Comments|
||||||
Return on||||||
Capital|NPBT|100|88|70||
|Av. OA|(286 + 230) ?2|(230 + 162) ?2|(162 + 144)|Industry ave|
||100 x 100|88 x 100|?2||
||258|196|70 x 100||
||38, 76%|44, 9%|153||
||||45.7%||
||||||
I N T E R P R E T A T I O N :
XYZ Limited s return on capital declined from
45.7% in 1998 to 44.9% in 1999. This decrease is mainly due to the increase in assets, but further investigation is required to analyse the extent of this decrease.
The decrease continued further from 44.9% in 1999 to 38.76% in 2000. Again this decrease is due to an increase in assets. The question that arises therefor is: “Is this phenomena as a result of mismanagement of assets, or just because
XYZ Limited is starting up and still growing?”
Additional investigation would be required to analyse the extent of the decrease.
1.1.1.2 NET PROFIT RATIO:
The primary objective of an enterprise is to make a profit. Profit is earned from sales and serves as an important measure of return of capital.
The Net Profit percentage can be measured by the following ratio:
Net Profit
Sales
This Net Profit Ratio