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8/8/2019 Profitability Analysis (Sapphire Fibres Limited)
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Profitability Analysis
Definition
The overall effectiveness of the management to generate profit for the owner
Types
1. General Profitability
2. Return Analysis
Items Involved
Sales
Gross Profit
Operating Profit
Net Profit
Operating Expenses
Total Assets
Operating Assets
Total Equity
Investment
Year Involved
Base Year : 2007
Current Year : 2008
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8/8/2019 Profitability Analysis (Sapphire Fibres Limited)
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1-General Profitability Analysis
Name of ratios 2007 2008 Result Reasons
Gross profitratio
16.88% 16.75% Unfavorable Sales increase 15.41%Gross profit increase 14.49%
Operating
profit ratio
13.02% 26.58% Favorable Operating profit increase
135.62%
Sales increase 15.41%
Operating ratio 87.98% 85.91% Favorable Operating expense increase15.99%
Sales increases 15.41%
Net profit ratios 8.00% 20.56% Favorable Net profit increase 196.41%
Sales increase 15.41%
Critical Analysis
The general profitability analysis of Sapphire Fibers Limited shows that profitability of the
company is augmented in the year 2008 as contrast to the year 2007. Although the sales of the
company in comparative years has also increased by 15.41% but I couldnt affect much. The
encouraging changes in Gross profit which is increased by 14.49%, Operating profit increased by
135.62% and net income increased by 196.41% shows that now company is in great position to
pay its operating cost, financial cost and can also provide reasonable return to the owners.
Operating Leverage
The result of operating ratio shows favorable result which means that the operating leverage
(burden of operating cost) of the company has decreased and the company is optimally utilizing
its operating fixed cost to get profits for the owner.
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8/8/2019 Profitability Analysis (Sapphire Fibres Limited)
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2-Return Analysis
Name of ratios 2007 2008 Results Reason
ROA 4.10% 10.83% Favorable Net profit increase 196.41%Sales increase 15.41%
ROOA 8.87% 19.64% Favorable Operating fixed assets increase
7.62%
ROE 5.19% 17.86% Favorable Equity 29.56%
ROI 5.5% 15.8% Favorable Net profit 9.11%
Amount invested 8.55%
Critical Analysis
Result
The return analysis of the sapphire fibers limited shows that the all the parameters which are
used to investigate the overall efficiency of management are constructive as compare to the base
year. This favorable result would be helpful for the future growth of the company both in short
term and long term.
Reason
The favorable result is backed by positive changes in the sales which are increased by 15.41%,
operating profit which is increased by 135.62% and positive change in total assets which is
increased by 12.28%; although the Equity is decreased by 1.504%.
ROE > ROI > I
In year 2008 the return on equity which is 17.68% is greater than the return on investment which
is 15.87% so we can conclude from here that the return on investment is greater than Interest.
This equation shows that the owner is receiving additional than the market return and the
business potential is more than the market so owner can increase the investment. The owner can
make this investment by getting debt which will result in savings as ROI is greater than Interest
so the difference of these two would result in savings.
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8/8/2019 Profitability Analysis (Sapphire Fibres Limited)
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DUPONT OF ROA
Years ROA = Profitability X Activity
2007 0.0409 = 0.080 X 0.512
2008 0.1083 = 0.2056 X 0.5268
The DuPont of return on asset indicates that the ratio is increasing in year 2008 because of
increase in profitability and increase activity. The profitability has increased by 157% and the
activity is increased by 2.89%. These two factors shows that the company is running at the great
pace and it will remain consistent in the near future. One is under consideration that activity is
increasing at slow pace so company need to focus more upon the solvency.
DUPONT OF ROE
Years ROE = Profitability X Activity X Solvency
2007 0.0589 = 0.080 X 0.512 X 1.44
2008 0.1779 = 0.2056 X 0.5268 X 1.643
The DuPont of return on equity indicates that the ratio is increasing in year 2008 because of
increase in activity 2.89% where as solvency is increasing by 14.09% and profitability is
increased by 157%. We see that the profitability is increased more than activity and solvency, so
the company is need to focus upon activity and solvency.
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8/8/2019 Profitability Analysis (Sapphire Fibres Limited)
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DUPONT OF ROOA
Years ROOA = Operating Profitability X Operating Activity
2007 0.0897 = 0.1302 X 0.6897
2008 0.1963 = 0.2658 X 0.7388
The DuPont of return on operating assets indicate that the ratio is increasing in year 2008
because of increase in operating profitability by 104.14% whereas the operating activity has
increased by 7.11%. This shows that company can further increase return on operating assets by
focusing on its operating profitability.