You are on page 1of 19

PROFITABILITY RATIOS Profitability is an indication of the efficiency with which the operations of the business are carried on.

Poor operational performance may indicate poor sales and hence poor profits.a lower profitability may arise due to the lack of control over the expenses.bankers, financial institutions and other creditors look at the profitability ratios as an indicator whether or not the firm earns substantially more than it pays interest for the use of borrowed funds and whether the ultimate repayment of their debt appears reasonably certain. The following are the important profitability ratios:

It is calculated in the basis of the following formula: Operating Profit Overall Profitability Ratio = Capital Employed YEARS Operating Profit Capital Employed Over All Profitability Ratio 2007-2008 41260. Over all profitability is mainly affected by capital employed in the business due to the consistent increase in capital as a result of increase in accumulating the reserves from 2008-2010. Return On Shareholder’s Funds .02 22.04 28. In 2008.2 284704.20 % respectively.20 % X 100 Capital employed = capital + reserves and surplus + secured loans + unsecured loans Interpretation From the above table. It indicates the percentage of return on the total capital employed in the business.64 335278.97 % 2008-2009 81480. it indicates that the percentage of return on the total capital employed gets highly deviated from year to year.97% of return on the total capital employed while in 2009 and 2010 .28.Over All Profitability Ratio It is also called as” return on investment”(ROI) or” return on capital employed(ROCE). 22.41 179641.2 21.62 % 2009-2010 71092.62% and 21.

63% Interpretation .5 26.05 44.2008 20976 79443.81 32.It is calculated to work out the profitability of the company from the shareholders point of view.04% 2009. it should be computed as follows Net Profit After Int & Tax Return On Shareholder’s Funds = Shareholders Funds X 100 YEARS Net Profit After Int & Tax Shareholders Funds Return On Shareholders Funds 2007 .2009 49637.2010 46819.40% 2008 .8 112714.89 143498.

2009 111997.62 271449.89 439059.4% in 20072008 to 44.61% .95 21. Net Profit After Int +Tax Return On Total Assets = Total Assets X 100 YEARS Net Profit After Int + Tax Total Assets Return On Total Assets 2007 .2008 45707.It is stated above that return on shareholders funds has increased from 26.26 23.52 16.92% 2009.89% 2008 . Return On Total Assets This ratio is computed to know the productivity of the total assets.63% in 2009-2010 due to the consistent increase in shareholders funds but inturn sales have decreased in 2010 when compared to 2009 which result in decrease in net profit.2010 94867.8 468153.04% in 2008-2009 and again decreased to 32.

61% in 2010 as total assets have decreased from 2009 to 2010.92% in 2009 and decreased to 21.Interpretation It is shown that return on total assets has been increased from 16.6 73.This is mainly due to increase in inventory as well in cash and bank balances which leads to increase in current assets inturn productivity of assets gets increased.05 % X 100 .19 283052.2008 94429. Gross Profit Ratio This ratio expresses the relationship between gross profit and net sales.2009 245421 215528.2010 206764.78 216845.89% in 2008 to 23.87 % 2009.55 % 2008 .35 43. Gross profit Gross profit ratio = Net sales YEARS Gross Profit Net Sales Gross Profit Ratio 2007 .78 113.

2 215528. It helps in determining the efficiency with which affairs of the business are being managed. it has come down to 73.35 19.55% in 2008 to 113.03% 2008 .12 % X 100 . Net Profit Ratio This ratio indicated net margin earned on a sale of rs.2009 81480.05% as increase in the cost of goods sold.80 % 2009.Interpretation It is noted that gross profit ratio has increased from 43.6 25.64 283052.2008 41260.87% in 2009.2010 71092.100. This may be due to government subsidies are given during the period of 2008-2009.It is calculated as follows: Net Operating Profit Net Profit Ratio = Net Sales Years Net Operating Profit Net Sales Net Profit Ratio 2007 .78 37.41 216845. During the year 2010 .

They indicate the efficiency with which the capital employed is rotated in the business.12 % in 2010 denotes operating profit has been come down when compare to 2009 operating profit. Turnover ratios: The turnover ratios are also known as activity or efficiency ratios. The following are the important turnover ratios: .Interpretation It is indicated that there is a improvement in the operational efficiency in the business as an increase in the ratio from 2008 to 2009. But it has slowly came down to 25.

The ratio is calculated as follows: Net sales Fixed Assets Turnover Ratio = Fixed assets YEARS Net Sales Fixed Assets Fixed Assets Ratio 2007 .6 2.35 73538.2010 283052. it indicated whether the investment infixed assets has judicious or not.78 79183.2008 216845.46 2.2009 215528.9 2 times 2008 . If compared with a previous periods.75times Turnover .26 times 2009.6 81731.Fixed Assets Turnover Ratio This ratio indicates the extent to which the investments in fixed assets contribute towards sales.

In case a company can achieve higher volume of sales with relatively small amount of working capital . Working Capital Turnover Ratio This is also known as working capital leverage ratio. This ratio indicates whether or not working capital has been effectively utilized in making sales. This ratio is calculated as follows: Net sales Working Capital Turnover Ratio = Fixed assets X 100 .it is an indication of the operating efficiency of the company.Interpretation There has been increased in the fixed assets turnover ratio throughout the year as the investment in fixed assets has brought about commensurate gain.

It is a sound principle of finance that the short term requirements of funds should be met out of short term funds and long term requirements should be met out of long term funds.04 240988. Financial ratios : Financial ratios indicate about the financial position of the company.17 Times Interpretation It is inferred that there has been increased in working capital turnover ratio throughout the year indicates working capital has been effectively utilised in making sales. Financial ratios can be divided into two broad categories: .78 372638.2009 215528.73 Times 2008 .6 336223.62 175502.35 162776.11 1. A company is deemed to be financially sound if it is in a position to carry on its business smoothly and meet its obligations.without the strain.79 79215.2010 283052.91 83561.Years Net Sales Current Assets (A) Current Liabilities (B) Working Capital (A-B) Working Capital Turnover Ratio 2007 .2008 216845.12 2.09 Times 2009.84 1.both short-term as well as long term.88 95235.51 197136.

the important liquidity ratios are as follows: Current Ratio This ratio is an indicator of the firms commitment to meet its short-term liabilities.”an enterprise must have adequate working capital to run its day to day operations.1) liquidity ratio 2) stability ratio liquidity ratio: these ratios are also termed as ‘working capital” or “short term solvency ratios. It is expressed as follows: Current Assets Current Ratio = Current Liabilities .An ideal ratio is 2.

Prepaid expenses and stock are not taken as liquid assets.2009 and 2010 respectively.2008 162776.2010 336223.in the year 2010.51 2.It is an indicator of short-term solvency of the company.5 in 2008. It is considered as a safe margin to solvency as an ideal ratio is 2 .1:1 2009.88 95235.the ideal ratio is 1. ratio has been increased may be due to excessive dependence on long term sources of raising funds which may lead to lower the profit in future.Years Current Assets Current Liabilities Current Ratio 2007 .91 83561.04 3.1 and 3.this ratio os ascertained by comparing the liquid assets to current liabilities.5:1 Interpretation It is to be noted that current ratio is 1.9 .79 1.9 :1 2008 . Quick ratio This ratio is also termed as “acid test ratio” or liquidity ratio”.2.62 175502. Liquid Assets Quick Ratio = Current Liabilities .2009 372638.

5 0.76 2009-2010 181252.59 83561.20 2008-2009 132611.90 Interpretation It is shown above that the company is able to meet out the short term solvency in 2010 when compared to previous year as the ratio was below the ideal ratio 1.04 1. Super Quick Ratio This is a variation of quick ratio.79 0. The ratio is calculated as follows: Cash and bank balances super quick Ratio = Current Liabilities .4 175502.YEAR Liquid Assets Current Liabilities Liquidity Ratio 2007-2008 16890.9 95235.

1 2008-2009 34149.19 2009-2010 80985.85 Interpretation It is observed that though the cash and bank balances has been increased throughout the year .64 83561.year cash and bank balances current liabilities super quick ratio 2007-2008 6631.04 0.79 0. Stability ratios These ratios help in ascertaining the long term solvency of a firm.28 175502. .it may meet the short term solvency as a part but not the whole due to cash and bank balances are lower than the current liabilities .86 95235.5 0.

Fixed Assets Ratio .

1 0.93 2008-2009 79183. The ideal ratio is 1 and should not be more than 1.57 Interpretation .This ratio explains whether the firm has raised adequate long term funds to meet its fixed assets requirements.It is expressed as follows: Fixed assets Fixed assets Ratio = Long term funds Year Fixed Assets Long Term Funds Fixed Assets Ratio 2007-2008 73538.8 0.6 112714.5 0.9 79443.70 2009-2010 81731.5 143498.

It shows that a part of the working capital has been financed through long term funds as the ratio is less than 1.26 2008-2009 171990 112714.it isalso known as “ external – internal equity” equity ratio.Thus.the company has adequate long term funds to meet its fixed assets requirements. Debt Equity Ratio The debt equity ratio is determined to ascertain the soundnessof the long term financial policies of the company.5 79443.4 143498.it may be calculated as follows: Total long term debt Debt equity ratio = Shareholders’ funds Year Total Long Term Debt Shareholders Funds Debt Equity Ratio 2007-2008 100197.8 1.37 .It is seen above that fixed asset ratio has brought down throughout the year.53 2009-2010 191779.5 1.1 1.

3 0.33 . It establishes relationship between the proprietors funds and the total tangible assets.29 2008-2009 112714.Interpretation It is referred that debt equity ratio for 3 years said to be unsatisfactory as shareholders funds are not equal to borrowed funds.24 2009-2010 143498. Proprietary ratio It is a varient of debt equity ratio.1 468153.5 0. It may be expressed as: Shareholders funds Proprietary ratio = Total tangible assets Year Share Holders Funds Total Tangible Assets Proprietory Ratio 2007-2008 79443.8 439060 0.5 271449.

. it may be the risk for the creditors of the company. So the company is advised to raise funds in order to prevent the creditors from risk.Interpretation As the proprietory ratio is below the 50% incase of all the 3 years.