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Accounts ppt
- 1. Submitted By: Nidal Mustafa116085 Nishkarsh Agarwal 116088 Rajat Goel 116105 Raunak Pahwa 116108
- 2. Introduction Profitability ratioscompare income statement accounts and categories to show a company's ability to generate profits from its operations. Profitability ratios focus on a company's return on investment in inventory and other assets. These ratios basically show how well companies can achieve profits from their operations.
- 3. What It Shows Investors and creditors can use it to judge a company's return on investment based on its relative level of resources and assets. It can be used to judge whether companies are making enough operational profit from their assets. It relate to efficiency ratios because they show how well companies are using their assets to generate profits.
- 4. Definitions “The ratiosthat measure the capacity of a firm to generate profits out of the expenses and the other cost incurred over a period are called the profitability ratios”. “The Profitability Ratios measure the overall performance of the company in terms of the total revenue generated from its operations”.
- 5. Types of ProfitabilityRatio Gross Profit Ratio Operating Profit Ratio Net Profit Ratio Return On Assets Return On Equity Return On Capital Employed Earning Per Share Dividend Pay Out Share
- 6. Gross profit Ratio The gross profit ratio looks at cost of goods sold as a percentage of sales. This ratio looks at how well a company controls the cost of its inventory and the manufacturing of its products and subsequently pass on the costs to its customers. The larger the gross profit ratio the better for the company.
- 7. Benefits Gross ratiomeasures a company's manufacturing and distribution efficiency during the production process. Investors use the gross profit ratio to compare companies in the same industry and also in different industries to determine what are the most profitable. A company that boasts a higher gross ratio than its competitors and industry is more efficient.
- 8. Formula Gross profit ratio= Gross profit X 100 Sales Gross profit and revenue figures are obtained from the income statement of a business. Alternatively, gross profit can be calculated by subtracting cost of goods sold from revenue. Thus gross profit ratio formula may be restated as: Gross Profit = Revenue − Cost of Goods Sold Revenue
- 9. Net profit Ratio Net profit Ratio is the percentage of revenue remaining after all operating expenses, interest, taxes and have been deducted from a company's total revenue. That shows relationship between net profit after tax and net sales.
- 10. FORMULA Total Revenue-Total Expenses(Net Profit) X 100 Sales It shows how good a company is at converting revenue into profits available for shareholders. Net profit ratio is often used to compare companies within the same industry.
- 11. Using the formula andthe information above, we can calculate that Company XYZ's net profit ratio was : 30,000/1,00,000*100 = 30% Income statement of company XYZ for the year ended 2015 Total Revenue ₹100000 Cost of Goods Sold ₹20000 Gross profit ₹80000 Operating expenses Salaries ₹10000 Rent ₹10000 Utilities ₹5000 Depreciation ₹5000 ₹30000 Interest Expenses ₹10000 Tax ₹10000 ₹20000 Net profit ₹30000
- 12. Operating Profit Ratio Operating ratio is a measurement of what proportion of a company's revenue is left over after paying for variable costs of production such as wages, raw materials. It is earnings before interest and taxes. It is a measure of overall operating efficiency, incorporating all of the expenses of ordinary, daily business activity.
- 13. FORMULA Operating Profit Ratio= Operating Income X 100 Net Sales Operating Income= Net sales - (Cost of Goods Sold + Administrative and office expenses +Selling and distribution exp.)
- 14. Benefits Operating ratiomay be used to investigate a particular project or compare multiple projects within a company. A higher operating profit margin is desirable as it suggests greater potential to derive profits and more cushion against any increase in competition or costs.
- 15. Return on Assets Return on assets is an indicator of how profitable a company is relative to its total assets. It gives an idea as to how efficient management is at using its assets to generate earnings. It display as a percentage. Sometimes this is called as return on investment. Return on assets indicates the net profit earned on each rupee of assets. Thus higher values of return on assets show that business is more profitable. This ratio should be only used to compare companies in the same industry.
- 16. FORMULA Return on Assets= Net income X 100 Total assets ROA tells you what earnings were generated from invested capital (assets). It gives investors an idea of how effectively the company is converting the money it has to invest into net income.
- 17. EXAMPLE Example Total assetsof Company X on July 1, 2010 and June 30, 2011 were $2,132,000 and $2,434,000 respectively. During the year ended June 30,2011 it earned net income of $213,000. Calculate its return on assets ratio. Solution Average Total Assets = ( $2,132,000 + $2,434,000 ) / 2 = $2,283,000 Return On Assets = $213,000 / $2,283,000 ≈ 0.09 or 9%
- 18. Return on Equity Return on equity (ROE) is the amount of net income returned as a percentage of shareholders equity. Return on equity measures a corporation's profitability by revealing how much profit a company generates with the money shareholders have invested. Higher values are generally favourable meaning that the company is efficient in generating income on new investment
- 19. FORMULA Return on Equity= Annual Net Income X 100 Average Shareholder's fund It shows that the company is doing a good job using the investors' money. ROE is also and indicator of how effective management is at using equity financing to fund operations and grow the company. Average shareholders' equity is calculated by dividing the sum of shareholders' equity at the beginning and at the end of the year by 2.
- 20. EXAMPLE Example :Company A earned net income of 1,722,000 during he year ending march 31, 2011. The shareholders' equity on April 30, 2010 and March 31, 2011 was 14,587,000 and16,332,000 respectively. Calculate its return on equity for the year ending March 31, 2011. Solution Average Shareholders' Equity = ( 14,587,000 + 16,332,000 ) / 2 = $15,459,500 Return On Equity = 1,722,000 / 15,459,500 ≈ 0.11 or 11% Also termed as- Return on Shareholder’s Fund= Net profit after Interest and Tax Shareholder’s Fund
- 21. Return on Capital EmployedRatio Return on capital employed is a profitability ratio that measures how efficiently a company can generate profits from its capital employed by comparing net operating profit to capital employed.
- 22. FORMULA ROCE = NetOperating Profit or(EBIT) Capital employed It shows how effectively assets are performing while taking into consideration long-term financing. To evaluate the longevity of a company. It also shows that how efficiently a company uses its capital employed as well as its long-term financing strategies. Capital employed is the sum of stockholders' equity and long-term finance. ROCE = Net Operating Profit or(EBIT) Total Assets-Current Liabilities
- 23. Benefits It helpsan investor determine the fund’s expected performance in the future. A high turnover results in increased costs for the fund and decreased returns for shareholders due to shareholders paying spreads and commissions when buying and selling stocks.
- 24. Earning Per ShareRatio(EPS) Earning Per Share of a business is the portion of its net income of a period that can be attributed t each share of its common stock. While comparing the profitability of stocks, their prices and the total earning of the respective companies do not help because we need to compare apples to apples
- 25. FORMULA The formulato calculate earnings per share is: Earnings per Share (EPS) = Net Income Number of Shares Outstanding
- 26. Dividend Pay OutRatio This ratio indicates the proportion of earnings available which equity share holders actually receive in the form of dividend. Pay out ratio = Dividend Paid Per Share Earning per share An investor primarily interested should invest in equity share of a company with high pay out ratio. But a company having low pay out ratio need not necessarily be a bad company.
- 27. Turn Over orActivity Ratio Activity ratios assess the efficiency of operations of a business. For example, these ratios attempt to find out how effectively the business is converting inventories into sales and sales into cash, or how it is utilizing its fixed assets and working capital, etc.
- 28. Types of Turnover Ratios Inventory Turnover Ratio Debtors Turnover Ratio Creditors Turnover Ratio Fixed Asset Turnover Ratio Current Assets Turnover Ratio
- 29. Inventory Turnover Ratio Inventory turnover ratio is also known as stock turnover ratio. Inventory turnover ratio shows the relationship between the cost of good sold and the average inventory. Inventory turnover is a ratio showing how many times a company's inventory is sold and replaced over a period of time.
- 30. Inventory Turnover Ratio= Cost of Goods Sold Average stock Cost Of Good Sold = Opening stock+ Purchases + Carriage Inward+ Direct wages and expenses- Closing Stock Cost Of Good Sold =Sales - Gross profit Average stock = (Opening stock + closing stock)/2 A higher ratio would indicate that company is able to sell its products quickly. A lower ratio would imply that has not been efficient in its work.
- 31. Debtors Turnover Ratio Debtors turnover ratio is also called receivable turnover ratio. It measures how effectively the company is collecting the cash from its creditors for goods sold on credit by the company.
- 32. Debtors TurnoverRatio = Net credit sales Average Account receivable *Account Receivable includes 'trade debtors and bills receivable'. A high ratio would indicate that company is able to collect cash from its creditors quickly.
- 33. Creditors Turnover Ratio It is also called account payable turnover ratio It measures how quickly the company pays its creditors for goods purchased by the company on credit. Creditors Turnover Ratio = Net Credit Purchase Average Creditors + Average Bills Payables A high ratio would indicate that company is paying its creditors quickly While a lower ratio would imply that company is not able to pay creditors on time which in turn will indicate worsening financial position of the company.
- 34. Fixed assets turnoverratio It is also termed as the ratio of sales to fixed assets. It indicates how efficiently the fixed assets are used. It measures the efficiency with which the firm has been using its fixed assets to generate sales.
- 35. FORMULA Fixed Assets =Net Sales Turnover Ratio Gross Fixed Asset –Depreciation A higher ratio would imply that company is using fixed asset to generate more sales. While a lower ratio would imply that company has been inefficient in using the fixed assets.
- 36. Current Asset TurnoverRatio It signifies the total sales done by the company with an investment in the current asset. Current assets turnover ratio shows the relationship between net sales and current assets.
- 37. FORMULA Current AssetTurnover Ratio = Net Sales Current Asset A higher ratio implies that company has been successful in utilizing the current assets; current assets include cash, stocks, debtors, prepaid expense and so on.