profitability analysis (sapphire fibres limited)

8/8/2019 Profitability Analysis (Sapphire Fibres Limited)

1/5

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


2/5

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.


3/5

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.


4/5

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.


5/5

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.

profitability analysis (sapphire fibres limited)

Documents