PROFITABILITY RATIO

Gross profit: Revenue = Gross Profit

Sales

2007 2008 2009

RM’000 RM’000 RM’000

$4,708,352 $9,734,350 $4,283,410

$105,015,542 x 100 $101,320,001 x 100 $87,079,122 x 100

= 4.48% = 9.61% =4.92%

See how the gross profit vary from 2007,2008 and 2009 from year to year.. For example, the
2007 has a gross profit margin of only 4.48% yet 2008 has gross profit margin of 4.48% ,and
200094.92% . If a company's raw materials and factory wages go up a lot, the gross profit
margin will go down unless the business increases its selling prices at the same time.The
gross profit margin ratio tells us the profit a business makes on its cost of sales, or cost of
goods sold. It is a very simple idea and it tells us how much gross profit per £1 of turnover
our business is earning.Gross profit is the profit we earn before we take off any
administration costs, selling costs and so on. So we should have a much higher gross profit
margin than net profit margin.
Net profit after tax: Revenue = Net profit after tax
Sales

2007 2008 2009

RM’000 RM’000 RM’000

$24,451,120 $24,372,168 $15,600,635

$105,015,542 x 100 $101,320,001x 100 $87,079,122 x 100

=23.28% = 24.05% =17.92%

The net profit 2007 is 23.28% for 2008 24.05% and 2009 17.92%.
The net profits of a company after taxation. This is the 'bottom line' that you often hear about.
Dividends are paid out of net profits after tax, and the amount that isn't paid out is the
retained profit.

Return on capital employed = Profit before interest and tax

Total assets - current liabiliti

2007 2008 2009

RM’000 RM’000 RM’000

$ 26711538 $ 30724290 $ 15933695

$174,037,481 - $556,93,629 $150,763,700 - $34,531,325 $13,5820,417 - $28,960,369

= 0.22571 = 0.26434 = 0.14977

The return on capital employed is an important measure of a company's profitability. Many

investment analysts think that factoring debt into a company's total capital provides a more
comprehensive evaluation of how well management is using the debt and equity it has at its
disposal. Investors would be well served by focusing on ROCE as a key, if not the key, factor
to gauge a company's profitability. An ROCE ratio, as a very general rule of thumb, should
be at or above a company's average borrowing rate.
Unfortunately, there are a number of similar ratios to ROCE, as defined herein, that are
similar in nature but calculated differently, resulting in dissimilar results. First, the acronym
ROCE is sometimes used to identify return on common equity, which can be confusing
because that relationship is best known as the return on equity or ROE. Second, the concept
behind the terms return on invested capital (ROIC) and return on investment (ROI) portends
to represent "invested capital" as the source for supporting a company's assets. However,
there is no consistency to what components are included in the formula for invested capital,
and it is a measurement that is not commonly used in investment research reporting.

Return on share capital = Profit before tax

Share capital + reserves

2007 2008 2009

RM’000 RM’000 RM’000

$ 26,705,654 $30,721,244 $ 15,930,564

$143,040,630+6,428,864 $57,687,576+25,834,450 $57,687,576+18,356,207

= 0.01787 = 0.36782 = 0.2095

thare capital usually comprises the nominal values of all shares issued, less those repurchased
by the company. It includes both common stock (ordinary shares) and preferred stock
(preference shares). If the market value of shares is greater than the their nominal value
(value at par), the shares are said to be at a premium (called share premium, additional paid-
in capital or paid-in capital in excess of par).

Net profit after tax: Total assets = net profit after tax______
Non-current assets + working capital

2007 2008 2009

RM’000 RM’000 RM’000

$24,451,120 $24,372,168 $1,560,635

$40,043 + $164,386 $55,891 + $164,386 $100,789 + $164,386

= 0.43004 = 0.43170 = 0.27357

The profit margin tells you how much profit a company makes for every $1 it generates in
revenue or sales. Profit margins vary by industry, but all else being equal, the higher a
company's profit margin compared to its competitors, the bette. some cases, lower profit
margins represent a pricing strategy. Some businesses, especially retailers, may be known for
their low-cost, high-volume approach. In other cases, a low net profit margin may represent a
price war which is lowering profits, as was the case with the computer industry way back in
2000.
 SOLVENCY RATIO

Current ratio = current assets__

Current liabilities

2007 2008 2009

RM’000 RM’000 RM’000

$41,865,761 $28,622,454 $220,64,847

$55,693,629 $34,531,325 $28,960,369

= 0.07517 = 0.82889 = 0.76189

current ratio is another test of a company's financial strength. It calculates how many dollars
in assets are likely to be converted to cash within one year in order to pay debts that come
due during the same year. You can find the current ratio by dividing the total current assets
by the total current liabilities. For example, if a company has $10 million in current assets
and $5 million in current liabilities, the current ratio would be 2 (10/5 = 2).

Acid test ratio = current assets – inventory

Current liabilities

2007 2008 2009

RM’000 RM’000 RM’000

$41,865,761-19,662,152 $28,622,454-11,234,017 $22,064,847-7,512,067

$55,693,629 $34,531,325 $28960369

= 0.39867 = 0.50355 = 0.50251

The Acid-Test ratio measures purely the company’s financial performance. As outside factors
only have a minor effect on the result the company, its conclusions are safe. As such it is also
easy to compare it with that of other companiest for the same industry.
The Acid-Test ratio measures the short term liquidity of a company. During an Acid-Test
analysis the short term assets are weighted againt the current liabilities.

The name comes from the process of extracting gold from rock that are mined in gold mines.
Gold, unlike other metals, do not corrode if submerged in acid. When the gold nugget is
submerged in the acid an if it does not dissolve, that that realy is gold. The concept regarding
financial statements of companies indicate that is the company “passes” the Acid-Test Ratio,
then the company, is able to pay its shot term debts.

To calculate it you need to divide the sum of the cash of the company, account receiveables,
and all the short term investments of the observed company with the current liabilities. It is
very important, that when the numerator and the denominator of the ratio is assembled
together only short term entries be considered; short term accounting entries that are liquid,
that is, they can be monetised quickly and cheaply
 EFFICIENCY RATIO

Asset turnover = _______Revenue_____________

Total assets - current liabilities

2007 2008 2009

RM’000 RM’000 RM’000

___$584,251_____ __ $8,574,455 ___ $663,902____

$307,809 - $81,895 $348,302 - $113,5772 $335,151 - $97,435

= 2.5862 = 2.7498 = 2.7928

The asset turnover ratio calculates the total revenue for every dollar of assets a company
owns. To calculate asset turnover, take the total revenue and divide it by the average assets
for the period studied. (Note: you should know how to do this. In lesson 3 we took the
average inventory and receivables for certain equations. The process is the same. Take the
beginning assets and average them with the ending assets. If XYZ had $1 in assets in 2000
and $10 in assets in 2001, the average asset value for the period is $5 because $1+$10
divided by 2 = $5.) A quick exercise would benefit your understanding. There are several
general rules that should be kept in mind when calculating asset turnover. First, asset turnover
is meant to measure a company's efficiency in using its assets. The higher the number, the
better, although investors must be sure compare a business to its industry. It is fallacy to
compare completely unrelated businesses. The higher a company's asset turnover, the lower
its profit margin tends to be (and visa versa).

Inventory turnover = _Cost of goods sold__

Average inventory

2007 2008 2009

RM’000 RM’000 RM’000

______$501,564 _ $545,656_____ _ $596,459

( $46,997 + $45,551) /2 ($54,795 + $46,997) /2 ($66,238 + $54,795) /2

= 10.839 = 10.720 = 9.8561

this ratio tells how often a business' inventory turns over during the course of the year.
Because inventories are the least liquid form of asset, a high inventory turnover ratio is
generally positive. On the other hand, an unusually high ratio compared to the average for
your industry could mean a business is losing sales because of inadequate stock on hand. If
your business has significant assets tied up in inventory, tracking your turnover is critical to
successful financial planning. If inventory is turning too slowly, it could indicate that it may
be hampering your cash flow. Because this ratio judges annual inventory turns, it is usually
conducted once a year.

Accounts receivable days = Accounts receivable

Revenue X 365

2007 2008 2009

RM’000 RM’000 RM’000

___$19,146__ $9.961__ _ $9.767____

$584,251 X 365 $645,458 X 365 $663,902 X 365

= 11.9691 = 5.633 = 5.370

A company that provides customers credit, or that allows payments over time needs to have a
good understanding of when they can be expect to be paid. Looking at historical ratios can
provide insight, as well as offering an opportunity to benchmark against other companies.

The days in accounts receivable ratio is, as the name implies, the calculation of how many
days of cash are locked up in receivables. The ratio is best used as an indicator to compare
time periods or against like companies. If the number is increasing from a prior year, it may
indicate a problem. The company can positively impact the ratio by becoming more
aggressive in collecting debts.

Since industries differ in customers and payment terms, it may not be a helpful measure
against non-similar companies. Comparing against a competitor or an industry benchmark
can inform the company on the success of its credit and collection efforts
Accounts payable days = Accounts payable
Purchases X 365

2007 2008 2009

RM’000 RM’000 RM’000

___$572,819___
_ $1,107,119____ _ $194,012___
$8,165,237 X
$2,177,191 X 365 256,012 X 365
365
= 18.5605 = 27.6605
= 25.605

ratio measuring the extent that accounts payable represent current rather than overdue
obligations. A comparison should be made to the terms of purchase. Accounts payable are
divided by the purchases per day. The latter is determined by dividing purchases by 360 days.
Assume accounts payable is $50,000 and purchases are $800,000. The ratio is:
 SEGI COLLAGE SUBANG JAYA

INTRO TO FINANCE

AHAMAD NAFIS BIN SUKRI

SCSJ-0006095
(DIA)