PROFITABILITY ANALYSIS AND PERFORMANCE MEASUREMENT

An analysis of costs and revenue to determine whether or not a venture will make a profit, and, if so, how much.
This is important information in deciding on whether to make an investment. The length of time required to repay
the initial investment can be a critical factor. 

PURPOSE

Profitability Analysis enables you to evaluate market segments, which can be classified according to products,
customers, orders or any combination of these, or strategic business units, such as sales organizations or business
areas, with respect to your company's profit or contribution margin.

The aim of the system is to provide your sales, marketing, product management and corporate planning departments
with information to support internal accounting and decision-making.

Costing-based Account-based
Value fields Cost and revenue elements
Revenues 1,000,000 800000 Revenues 1,000,000
Sales deductions 100,000 808000 Sales deductions 100,000
-------------- --------------
Net revenues 900,000 Net revenues 900,000
Var. material costs 400,000 893000 Cost of sales 690,000
Var. production costs 190,000 231000 Price differences 10,000
Production variances 10,000 651000 R&D 10,000
-------------- 671000 Marketing 50,000
Contribution margin 1 300,000 655000 Sales and administration 40,000
Material overhead 50,000 --------------
Production overhead 50,000 Result 100,000
--------------
Contribution margin 2 200,000
R&D 10,000
Marketing 50,000
Sales costs 40,000
--------------
Contribution margin 3 100,000

PROFITABILITY RATIOS
RELATED TO SALES

 Gross Profit margin

 Operating profit margin
 Pre-tax profit ratio
 Net profit ratio

RELATED TO EXPENSES

 Cost of goods sold ratio

 Operating expenses ratio
 Administration expenses ratio
  Selling expenses ratio
 Financial expenses ratio

RALATED TO INVESTMENT

 ROI
 ROA
 ROCE
 ROE

PROFITABILITY ANALYSIS OF:

 Present market opportunity

 Profit potential
 Customer profitability
 Competitive strength

PERFORMANCE MEASUREMENT

Performance measurement is a fundamental building block of TQM and a total quality organization.
Historically, organizations have always measured performance in some way through the financial performance, be
this success by profit or failure through liquidation.
However, traditional performance measures, based on cost accounting information, provide little to support
organizations on their quality journey, because they do not map process performance and improvements seen by the
customer. In a successful total quality organization, performance will be measured by the improvements seen by the
customer as well as by the results delivered to other stakeholders, such as the shareholders .

Performance measurement plays important role in:

• Identifying and tracking progress against organizational goals
• Identifying opportunities for improvement
• Comparing performance against both internal and external standards

The main reasons it is needed are:

• To ensure customer requirements have been met
• To be able to set sensible objectives and comply with them
• To provide standards for establishing comparisons
• To provide visibility and a “scoreboard” for people to monitor their own performance level
• To highlight quality problems and determine areas for priority attention
• To provide feedback for driving the improvement effort

METHODS TO MEASURE PERFORMANCE

• Balanced Scorecard
• Economic Value Added
• Activity-based costing
• Quality Management
• Customer Value Analysis
• Action-Profit Linkage Model
ALOK INDUSTRIES

Balance sheet of Alok Ind. Rs. In Cr.

  Mar '06 Mar '07 Mar '08 Mar '09 Mar '10

Sources
Of Funds          
Total Share Capital 225.47 170.37 187.17 196.97 787.79
Equity Share Capital 157.47 170.37 187.17 196.97 787.79
Share Application Mone
y 0 0 110.16 147.7 0
Preference Share
Capital 68 0 0 0 0
Reserves 650.06 854.07 1,134.01 1,399.19 1,928.23
Revaluation Reserves 0 0 0 0 0
Networth 875.53 1,024.44 1,431.34 1,743.86 2,716.02
Secured Loans 1,800.21 2,833.05 4,824.15 6,256.24 8,086.66
Unsecured Loans 344.29 503.71 943.16 340.11 423.02
Total Debt 2,144.50 3,336.76 5,767.31 6,596.35 8,509.68
Total Liabilities 3,020.03 4,361.20 7,198.65 8,340.21 11,225.70

Application Of Funds        
1,403.4
Gross Block 2 2,345.72 3,371.73 4,534.44 7,276.36
Less: Accum.
Depreciation 247.65 370.4 476.75 708.85 1,070.50
1,155.7
Net Block 7 1,975.32 2,894.98 3,825.59 6,205.86
Capital Work in Progress 718.47 608.48 996.32 2,158.28 939.25
Investments 39.7 219.49 618.96 478.58 229.69
Inventories 358.15 464.46 687.58 943.84 1,474.41
Sundry Debtors 354.53 544.52 607.71 884.18 1,101.23
Cash and Bank Balance 179.55 116.01 17.29 157.08 1,390.29
Total Current Assets 892.23 1,124.99 1,312.58 1,985.10 3,965.93
Loans and Advances 165.14 204.97 413.07 516.32 835.95
Fixed Deposits 353.48 669.29 1,656.45 187.87 0
Total CA, Loans & 1,410.8
Advances 5 1,999.25 3,382.10 2,689.29 4,801.88
Deffered Credit 0 0 0 0 0
Current Liabilities 278.43 403.87 657.22 782.75 895.91
Provisions 26.33 37.47 36.49 28.78 55.07
Total CL & Provisions 304.76 441.34 693.71 811.53 950.98
1,106.0
Net Current Assets 9 1,557.91 2,688.39 1,877.76 3,850.90
Miscellaneous Expenses 0 0 0 0 0
Total Assets 3,020.0 4,361.20 7,198.65 8,340.21 11,225.70
 3
Contingent Liabilities 211.18 374.58 342.56 388.16 522.72
Book Value (Rs) 51.28 60.13 70.59 81.03 34.48

Profit and loss Account

Mar '06 Mar '07 Mar '08 Mar '09 Mar '10

Income          
Sales Turnover 1,472.95 1,878.60 2,233.70 3,011.71 4,382.81
Excise Duty 53.47 53.49 68.49 38.26 71.64
Net Sales 1,419.48 1,825.11 2,165.21 2,973.45 4,311.17
Other Income 13.14 86.86 166.11 78.29 64.02
Stock Adjustments 20.59 65.33 101.44 385.67 333.82
Total Income 1,453.21 1,977.30 2,432.76 3,437.41 4,709.01
Expenditure          
Raw Materials 905.59 1,161.40 1,291.13 1,937.09 2,471.78
Power & Fuel Cost 66.79 89.74 121.55 211.89 319.28
Employee Cost 30.44 50.37 83.61 117.45 153.73
Other Manufacturing Expenses 28.81 41.46 55.68 61.43 0
Selling and Admin Expenses 54.53 78.5 80.75 108.76 0
Miscellaneous Expenses 54.34 60.61 88.99 111.83 491.74
Preoperative Exp Capitalised 0 0 0 0 0
Total Expenses 1,140.50 1,482.08 1,721.71 2,548.45 3,436.53

Operating Profit 299.57 408.36 544.94 810.67 1,208.46

PBDIT 312.71 495.22 711.05 888.96 1,272.48
Interest 78.23 141.8 242.82 370.55 535.08
PBDT 234.48 353.42 468.23 518.41 737.4
Depreciation 80.48 123.04 161.96 233.5 362.61
Other Written Off 0 0 0 0 0
Profit Before Tax 154 230.38 306.27 284.91 374.79
Extra-ordinary items 2.16 2.16 0.62 -0.49 0.86
PBT (Post Extra-ord Items) 156.16 232.54 306.89 284.42 375.65
Tax 44.79 67.45 98.93 95.88 128.31
Reported Net Profit 109.21 164.86 198.66 188.37 247.34
Total Value Addition 234.91 320.68 430.58 611.36 964.75
Preference Dividend 7.59 0.74 0 0 0
Equity Dividend 18.9 23.85 22.46 14.77 19.69
Corporate Dividend Tax 3.71 4.16 3.82 2.51 3.27

Per share data (annualised)          

Shares in issue (lakhs) 1,574.68 1,703.72 1,871.75 1,969.75 7,877.98
 Earning Per Share (Rs) 6.45 9.63 10.61 9.56 3.14
Equity Dividend (%) 12 14 12 7.5 2.5
Book Value (Rs) 51.28 60.13 70.59 81.03 34.48

Profitability Ratios

Profitability Ratios          
Operating Profit Margin(%) 19.51 21.1 22.37 24.74 27.26
Profit Before Interest And Tax
Margin(%) 14.71 15.29 15.19 16.34 18.87
Gross Profit Margin(%) 14.61 16.36 17.01 17.26 19.41
Cash Profit Margin(%) 11.84 13.24 15.32 13.81 14
Adjusted Cash Margin(%) 11.84 13.23 13.42 13.81 14
Net Profit Margin(%) 7.19 7.62 8.77 8.68 6.16
Adjusted Net Profit Margin(%) 7.2 7.61 6.87 8.68 6.16
Return On Capital Employed(%) 9.62 7.68 7.75 6.88 7.92
Return On Net Worth(%) 13.08 12.47 16.09 15.03 11.8
Adjusted Return on Net Worth(%) 13.59 12.57 12.52 11.65 12.2
Return on Assets Excluding
Revaluations 3.97 3.28 3.43 70.59 81.03
Return on Assets Including
Revaluations 3.97 3.28 3.43 70.59 81.03
Return on Long Term Funds(%) 11.98 8.95 8.92 7.6 8.82