MATRIX OF PROFITABILITY RATIOS

MATRIX OF PROFITABILITY RATIOS 

SR. NO	PROFITABILITY RATIOS	DESCRIPTION	EXPRESSION	IMPACT	BASED ON
1.	GROSS MARGIN	IT EXPRESSES THE RELATIONSHIP BETWEEN GROSS PROFIT AND SALES REVENUE. IT IS A MEASURE OF HOW WELL EACH RUPEE OF A COMPANY'S REVENUE IS UTILIZED TO COVER THE COSTS OF GOODS SOLD.	GROSS PROFIT / NET SALES	COMPANIES WITH HIGHER GROSS MARGIN PERCENTAGE, THE MORE THE COMPANY RETAINS ON EACH RUPEE OF SALES TO SERVICE ITS OTHER COSTS & OBLIGATIONS.	GROSS PROFIT & NET SALES
2.	OPERATING MARGIN	MEASURES A COMPANY'S PRICING STRATEGY AND OPERATING EFFICIENCY. OPERATING MARGIN GIVES AN IDEA OF HOW MUCH A COMPANY MAKES (BEFORE INTEREST AND TAXES) ON EACH RUPEE OF SALES.	OPERATING INCOME / NET SALES	A HIGHER OPERATING MARGIN MEANS THAT THE COMPANY HAS LESS FINANCIAL RISK.	OPERATING INCOME & NET SALES
3.	PROFIT MARGIN	IT IS AN INDICATOR OF A COMPANY'S PRICING STRATEGIES AND HOW WELL IT CONTROLS COSTS.	NET PROFIT (AFTER TAX) / SALES	A HIGHER PROFIT MARGIN INDICATES A MORE PROFITABLE COMPANY THAT HAS BETTER CONTROL OVER ITS COSTS COMPARED TO ITS COMPETITORS. IT MEASURES HOW MUCH OUT OF EVERY RUPEE OF SALES A COMPANY ACTUALLY KEEPS IN EARNINGS.	NET PROFIT & SALES
4.	RETURN ON EQUITY (ROE)	MEASURES THE RATE OF RETURN ON THE OWNERSHIP INTEREST (SHAREHOLDERS' EQUITY) OF THE COMMON  OWNERS. IT MEASURES A FIRM'S EFFICIENCY AT GENERATING PROFITS FROM EVERY UNIT OF SHAREHOLDERS' EQUITY (ALSO KNOWN AS NET ASSETS OR ASSETS MINUS LIABILITIES).	NET PROFIT (AFTER TAX) / SHAREHOLDER'S EQUITY	RETURN ON EQUITY MEASURES A CORPORATION'S PROFITABILITY BY REVEALING HOW MUCH PROFIT A COMPANY GENERATES WITH THE MONEY SHAREHOLDERS HAVE INVESTED.	NET PROFIT & SHAREHOLDER’S EQUITY OR “SHARE CAPITAL", "NET WORTH" OR "STOCKHOLDERS' EQUITY" OR SHAREHOLDER'S FUND".
5.	RETURN ON INVESTMENT (ROI)	IS THE RATIO OF MONEY GAINED OR LOST ON AN INVESTMENT RELATIVE TO THE AMOUNT OF MONEY INVESTED.	NET PROFIT (AFTER TAX) / INVESTMENT	RETURN ON INVESTMENT EVALUTES THE EFFIENCY OF AN INVESTMENT, MEANS HOW MUCH COMPANY IS GENERATING RETURN ON INVESTMENT.	NET PROFIT (AFTER TAX) AND INVESTMENT
6.	RETURN ON ASSETS (ROA)	RETURN ON ASSETS IS A TEST OF CAPITAL UTILIZATION THAT IS HOW MUCH PROFIT (AFTER INTEREST AND INCOME TAX) A BUSINESS EARNED ON THE TOTAL CAPITAL USED TO MAKE THAT PROFIT.	NET PROFIT (AFTER TAX) / TOTAL ASSETS	IT TELLS WHAT THE COMPANY CAN DO WITH WHAT IT HAS, I.E. HOW MANY RUPEES OF EARNINGS THEY DERIVE FROM EACH RUPEE OF ASSETS THEY CONTROL. IT'S A USEFUL NUMBER FOR COMPARING COMPETING COMPANIES IN THE SAME INDUSTRY.	NET PROFIT (AFTER TAX) AND TOTAL ASSETS
7.	RETURN ON NET ASSTES (RONA)	THE RETURN ON NET ASSETS MEASURES HOW EFFICIENTLY A COMPANY IS USING ITS NET ASSETS (ITS FIXED ASSETS AND NET WORKING INCOME) IN ORDER TO MAKE A PROFIT.	NET PROFIT (AFTER TAX) / FIXED ASSETS + WORKING CAPITAL	THE HIGHER THE RATIO IS, THE BETTER THE COMPANY'S PERFORMANCE IS THOUGHT TO BE.	NET PROFIT (AFTER TAX), FIXED ASSETS AND WORKING CAPITAL

Profitability ratios - Return on Net Assets

Return on Net Assets (RONA) is a measure of financial performance of a company which takes the use of assets into account. 

Note:- The return on Net Assets measures how efficiently a company is using its net assets (its fixed assets and net working income) in order to make a profit. The higher the ratio is, the better the company's performance is thought to be.

Return on Net Assets = Net Profit (After Tax) / Fixed Assets + Working Capital

ILLUSTRATION:-

There is an unaudited financial results for the quarter / half year ended 30, Sept 2010 and Balance Sheet of  BHEL Ltd. :-

From the above information we have following details:-

Net Profit (After Tax) = 11423

Fixed Assets = 41159

Working Capital or Net Current Assets = 120825

Return on Net Assets = Net Profit (After Tax) / Fixed Assets + Working Capital

So, Return on Net Assets = 11423 / 41159 + 120825 = .070 or 7%.

Analysis:-

Return on Net Assets is .070 means, Company is generating Rs. .070 on its every unit of Net Assets or Return is 7% on its Net Assets.

Profitability ratios - Return on Assets

Return On Assets (or ROA for short) is an indicator informing the user about how profitable a company is relative to its total assets. It tells the user how effective a business has been at putting its assets to work.

In other words, the ROA is a test of capital utilization, that is how much profit (after interest and income tax) a business earned on the total capital used to make that profit.

Note :- This number tells that what the company can do with what it has ,i.e. how many rupees of earnings they derive from each rupees of assets they control. It's a useful number for comparing competing companies in the same industry.

Return on Assets = Net Profit (After Tax) / Total Assets

ILLUSTRATION:-

There is unaudited financial results for the quarter/half year ended 30, Sept 2010 and Balance Sheet also of NTPC Ltd.:-

From the above the information we have following details:-

Net profit (After Tax) = 210738

Total Assets = 11918839 (Fixed Assets + Investments + Current Assets, Loans & Advances + Deferred Expenses)

Return on Assets = Net Profit (After Tax) / Total Assets

So, Return on Assets = 210738 / 11918839 = .017 or 1.7%

Analysis:-

Return on Assets is .017 means, Company is generating Rs. .017 earnings from its every rupees of its assets they control.