PROFITABILITY ASSESSMENT

It includes calculating cost of production, turnover, profits.

How is the cost of production calculated- the total cost of production is calculated by
addition of the fixed capital and the working capital and allowing for depreciation.

It is calculated on an annual basis because the fixed capital is not consumed in one
year but over the life period of the project.

CALCULATION OF NET PROFIT BEFORE INTEREST AND TAX

It is reducing the total cost of production from annual sales turnover.

Annual sales turnover-total cost of production = net profit NPBIT-interest=NPBT

Financial ratios
They are devices used for measuring financial conditions regarding financial changes. It
includes the financial ratios like-

1. Debt Equity Ratio- owner's capital signifies the contribution of the entrepreneur in
the form of margin money.
The debt capital signifies the contribution put in the form of the loans by financial
companies and banks.
A lower debt equity ratio is preferred as it involves less liability and more stake
involvement of the entrepreneur.

Debt equity ratio=total debt / Owners fund

2. NET PROFIT RATIOS(NPR)-

Net Profit Before Interest And Tax (NPBIT )/Annual Sales Turnover(AST )*100
It is the indicator of profitability of the concern.

3. Return On Investment(RO1)-

ROI=NPBIT/Total Investment = Net Profit Before Interest And Tax

ROI should be higher than the interest paid on the debt. It is the indicator of
performance and efficiency and it is the yardstick to measure it.