Profitability Dimension

There are many measures of profitability, which relate the returns of the firm to its sales, assets, or equity.  As a group, these measures allow the analyst to evaluate the firm’s earnings with respect to a given level of sales, a certain level of assets, or the owners’ investment.  Without profits, a firm could not attract outside capital.  Moreover, present owners and creditors would become concerned about the company’s future and attempt to recover their funds.  Owners, Creditors, and management pay close attention to boosting profits due to the great importance placed on earnings in the marketplace.
      
The profitability ratios are:

1. Gross profit margin
2. Operating profit margin
3. Net profit margin
4. Return on total asset (ROA)
5. Return on total equity (ROE)

Gross profit margin

The gross profit margin measures the percentage of each sales amount remaining after the firm has paid for its goods. It may be used as an indicator of the production operation and the relation between production cost and selling price. The gross profit margin is calculated as follows:

Gross Profit Margin = Gross Profit / Sales

Ratio                               2001            2000              1999            1998             1997
Gross profit margin          42.33%     42.56%         37.12%          37.63%        35.04%

Analysis
The gross profit margin has slightly decreased in 2001 compare with 2000. In 2001 sales has increased as well as gross profit margin has also increased The decline in gross profit margin has happened because of cost of good sold. It has increased more than 12% in 2001 on the other hand sales has increased just 11.95%.

To increase gross profit margin they should try to decrease their cost of goods sold. So we can say that they have failed to handle the COGS.

Operating profit margin

The operating profit margin measures the percentage of each sales amount remaining after all costs and expenses other than interest and taxes are deducted. A high operating profit margin is preferred. Operating profit margin is calculated as follows:

Operating Profit Margin = Operating profits / Sales

Ratio                               2001            2000              1999            1998             1997
Operating profit margin   22.54%        23.11%         18.70%         13.55%        12.81%

Analysis
From the analysis we find that there is continuous increment of operating profit margin till 2000 but in the year 2001 the turnover has slightly decreased. This has happened for inefficient use of operating expense. During 2001the sales has increased more than 11% but operating expense has increased more than 13%. As a result though operating margin increased but the ratio has failed to increase because of high operating cost.

From this discussion we can say that the firm had failed to control it’s operating cost and each and every components of operating cost has increased during 2001.