Gross profit is primary measurement of profitability that exposes the percentage of gross profit accomplished by a company on its net sales. Higher gross profit ratio leads to the high profitability. (Yadav R. Koirala, 2070)
The figure 1.1 shows the gross margin of Next Plc has slightly increased in 2016 compared to 2015 from 33.59% to 34.78% which represents a good percentage that may have arisen from the production costs or from a sale with a good sales value. On the contrary, in 2016 the gross margin of Debenhams Plc has decreased compared to 2015 from 12.88% to 12.53%. The key reason may be due to extreme cost of sales with respect to revenue earned.
• Operating profit Margin
Operating profit margin is calculated to measure the company’s
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20.30% to 20.76% in year 2015 to 2016 from the figure 1.2. It may have arisen due to increase in sales volume causing a decrease in the proportion of production costs due to economies of scale. The operating profit is too low and declining for Debenhams i.e. 5.77% in 2015 and 5.06%in 2016. The reason is lower gross profit and operational inefficiency.
• Net Profit Margin Ratio
The most commonly used ratio for measuring the profitability is net profit margin ratio that determines the overall profitability due to various factors like: operational efficiency, trading on equity (Yadav R. Koirala, 2070).
Analysing the table 1.3 we can see that the net profit margin has increased in 2016 compared than last year for Next Plc due to increase in selling price without increasing total expense and cost of goods sold (COGS). Hence, a company is in standard position. Instead, we also see Debenhams Plc has a declining net profit ratio which might be due to increase in COGS by the company to support all expenses for the period that occurred net loss. It is only 4.03% in financial year 2015 and 3.67% in the year 2016 which is unsatisfactory
• Expense to Revenue
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Management Efficiency Ratio
It also known as “activity ratio” that may be used to measure the efficiency with which particular resources have been used within the business.
• Trade Receivable Ratio
It is also known as collection period which measures the average number of days that a company takes to collect a receivable.
From Table 3.1 we obtain that the ratio for Next Plc and Debenhams has increased from 2015 to 2016 because cash is relatively lower than net income due to which company loosens its credit policy as collection interval is increasing day by day which is not good as they have to make up a lot of cash money, for which the company must be invested by other sector. The companies are not efficient in managing its account receivable.
• Trade Payable Ratio
It is also known as payment period that measures the average number of days spent before paying obligations to suppliers.
1. Since financial statement are analyzed by individual professionals the accountant has to make a choice out of various alternatives available. Hence the statements are never free from biased.
2. Ratios are incompetent to predict the future condition of business as accounting information are historical in
Lower profit discourages investment and gives an appearance of poor performance despite how well the business is performing. Low margins also leave little room for market fluctuations and situations like holding inventory longer alone, may lead to profitability issues.
The efficiency ratios are a mix of positive and negative aspects for the company. The asset turnover ratio has improved drastically over a period of 5 years. For an investment of $1, the company is able to produce $2 of sales revenue. Although the efficiency ratio may be positive, it is n...
Current Ratio – For the last three years was growing from 3.56 in 2001 to 3.81 in 2002 to 4.22 in 2003. The reason of grow is increased in Assets. Even though Liability was growing, Asset grow was more significant.
Financial analysis -net revenue grew in 2013 and declined 2014 to 2015. Net revenue declined approximately 15% in 2015. The main reason causing this decline is the increase in fixed assets over one year, meaning, the company’s assets were just sitting idle. After ROA declined in 2015 (company is not profitable) it does appear that it is increasing by 4% in 2016 due to rebranding of products.
The main contributing factor to the decline in the return on stockholders’ equity (25.37% to 8.73%) was the decline in the profit margin (11.79% vs. 5.08%). The decrease in asset turnover (1.11 to 1.00) made a small contribution to the decline, as did the decline in the debt ratio (48.4% to 41.8%).
...To check how successful it has been, we calculate debtor collection period ratio. (Dyson, 2004) Fixed Asset turnover: In this ratio, we seek the amount of sales that can be generated (or the amount of fixed assets necessary to achieve a level of sales) from a given level of fixed assets. (Klein, 1998) Total asset turnover: This ratio determines that how efficiently a firm is utilizing its assets. If the asset turnover ratio is high, the firm is using its assets effectively in generating sales. If this ratio is low, the firm may not be using its assets efficiently and shall either increase sales or eliminate some of the existing assets. (Argenti, 2002) Solvency Ratio Gearing: Gearing reflects the relationship between a company’s equity capital (ordinary shares and reserves) and its other form of long-term funding (preference share, debenture, etc.) (Black, 2000)
The benefits of these assumptions are that while maintaining the current growth rate of 13%; we can maintain our COGS. One of the major factors contributing to the firm’s poor profit margin is operating expenses.
The whole monetary of year 2016, overall sales reduced by 3% to reach $12.6 billion. The gross margin rate fell by 200 basis points to reach 40.8% in fiscal 2016. Adjusted EPS declined by 6% year over year to reach
... organization's management. The ratios were broken down into classifications of liquidity and asset utilization, debt and interest coverage, profitability and market-based ratios.
The 3 percent decline in sales causing a 21 percent decline in profits can be attributed to the identification of the accounting concept of operating leverage. Operating leverage is what business managers apply to boost small changes in revenue into sizable changes in profitability. Fixed cost is the force managers use to attain disproportionate changes between revenue and profitability. Therefore, when all costs are fixed every sales dollar contributes one dollar toward the potential profitability of a project. Once sales dollars cover fixed costs, each additional sales dollar represents pure profit. A small change in sales volume can significantly affect profitability (Edmonds, Tsay, & Olds, 2011). So, therefore, if sales volume increases,
Industry profitability: subpar to above average; fuel and maintenance costs, a growing senior staff division, unionisation of employees and competitive price wars are margins concerns.
Profitability ratios express ability of the company to produce profit. This shows how well a company is performing in a given period of time. To compare the profitability for the companies, the investors use profitability ratios that are return on equity, profit margin, asset turnover, gross profit, earning per share. Return on asset indicates overall profitability of assets. It is the relationship between net income and average total assets. GM has 0.034 and Ford has 0.036. This indicates Ford is more profitable. Profit margin is how much of every dollar of sales the company keeps. Computing profit margin, net income divided by net sales. This indicates higher profit margin is more profitable and it has better control. Thus, GM’s profit margin is 3.4 percentages and Ford’s is 4.9 percentages. This indicates Ford has better control profitably compared to GM. Next ratio is gross profit rate. It is how much of every dollar is left over after paying costs of goods sold. Assets turnover represents how efficiency a company uses its assets to sales. This ratio is relationship between net sales and average total assets. GM’s is 0.98 and Ford’s is 0.75. This result represents GM is using its assets more efficiently. Gross profit margin is dividing gross profit, which is equal to net sales less cost of gods sold, by net sales. This ratio indicates ability to maintain selling price above its cost of goods sold. GM’s gross profit rate is 11.6 percentages. Ford’s is 5.7 percentages. GM is higher ratio, and it indicates strong net income. Also, it indicates the company has to spend lower operating expenses and the company is able to spend left money for covering fixed costs. Earnings per share indicate the company’s net earnings to each share common stock. This ratio shows margin between selling price and cost of goods sold. From these companies’ income statement, GM is $2.71 and Ford is $1.82. Because GM’s value is higher relative to Ford’s,
68 Net Profit Margin 2.02% 2.09% 1.87% Amazon Revenue 2045 1902 1745 Net Income 207 167 145 Net Profit Margin 0.27% 0.56% 1.74% Wal-Mart Revenue 1550 1450 1250 Net Income 1920 1810 1327 Net Profit Margin 3.07% 3.39% 3.39% Source: Nasdaq (2017) The financial data of a company is often an indication of the From the financial data, the sustainability and profitability of the company can be established.
Looking at the previously conducted profitability ratios for Blackberry, we can notice that all the ratios are not only lower than Apple’s, but have also decreased throughout 2011 until 2013. However, for Apple, all conducted profitability ratios are increasing throughout a three-year time span, from 2010 to 2012. Gross margin measures the relationship between sales and the costs that support these sales. Blackberry’s gross margin has decreased from 2011-2013. It was 44% in 2011, but decreased to 35% in 2012.
..., the company is either generating insufficient margin to cover the high-service level or it is unable to deliver them at an acceptable cost.