Profitability

1. “The Social Responsibility of Business Is to Increase Its Profits” -- is likely one of the most assigned, and
most debated, papers in social issues pedagogy.
‘The Social Responsibility of Business is to Increase its Profits’
Milton Friedman
The New York Times Magazine
September 13, 1970
[http://umich.edu/~thecore/doc/Friedman.pdf]

2. A Company should have no "social responsibility" to the public or society because its only concern is to
increase profits for itself and for its shareholders and that the shareholders in their private capacity are the
ones with the social responsibility. Capitalism and Freedom (Milton Friedman)

3. In Capitalism and Freedom, Friedman writes: "There is one and only one social responsibility of business –
to use its resources and engage in activities designed to increase its profits so long as it stays within the
rules of the game, which is to say, engages in open and free competition without deception or fraud." [3]

4. The shareholder approach versus the stockholder approach.

5. Profit (Cash Basis and Accrual Basis) – and the principle of profit maximisation.

6. Profit (Various Connotation) and ‘ability’ to earn profit

7. Various Connotation – gross profit, Net Profit, Distributable profit, Operating Profit (Profit from
operations), EBIT. EBIDT, PAT, Earnings available for equity shareholders.

8. Accounting Return // Social profitability // Value added profitability

Retrun (operating profit )

9. Return of Investment (ROCE when Investment is CE) =
capital Employed

Retrun (operating profit ) Sales

= ×
Sales capital Employed
10. Return on capital employed depicts the effectiveness of all the operating decisions

11. Social profitability – The return on the basis of stock holder approach.
a. Social cost and private cost
b. The issue of externality (how private cost increase when social cost is sought to be neutralised)
c. The Pigou Tax effect [A Pigovian tax (also spelled Pigouvian tax) is a tax on any market activity that
generates negative externalities (costs not included in the market price). The tax is intended to correct an
undesirable or inefficient market outcome)
[https://en.wikipedia.org/wiki/Pigovian_tax]

12. Value added profitability – Profit and Loss statement as an example.

13. 'Triangular relationship' –The combination of profitability with operating profit margin and
turnover. The triangular relationship can be expressed in the forms of equation as follows: -
The DuPont analysis is a technique that breaks the return on asset and return on equity measures down into
basic components that determine profit efficiency, asset efficiency, and leverage in an attempt to help isolate
the causes of strengths and weakness in the firm’s performance.

Net profit (operating profit )

ROA =
Total Asset

Net profit ( operating profit ) Sales

= × [profit efficiency × asset efficiency]
Sales Total Asset

The ROA can also be thought of as the product of the profit margin and the asset turnover ratio. This is called
the DuPont Equation. For example, a company having a ROA of 12% may diagnose it as a multiplicative factor
of (.06) [net profit margin] and (.02) [Asset Turnover].

ROE can be broken down (as was done for ROA, previously) into three different components;
Net profit (operating profit ) Sales T otal Asset
ROE = × × ×
Sales Total Asset Equity
= profit efficiency × asset efficiency × leverage

Note that ROE is equivalent to ROA times an equity multiplier,

ROE = ROA × equity multiplier

This is called the extended DuPont equation.

Fig 1: The Extended Du Pont Analysis and its Components