Profitability Ratio

Gross Profit/Revenue Ratio = Gross Profit x 100

Revenue

2007 = 1155 x 100

2100

= 55%

2008 = 1265 x 100

2300

= 55%

Gross profit ratio measured the relationship of gross profit to net sales and is usually express as a percentage. It
represents the excess of what the concern is able to charge as sales price over the cost. This surplus is available
to meet the operating expenses and non – operating expenses. The amount remaining after meeting those
expenses represents the net profit, which belongs to shareholder.

Gross profit ratio is used by managers for analysis purpose. Managers also use gross profit margin for cost
control purpose. In the case of trading industries, gross profit margins are used to determine inventory in interim
statement, to ensure inventory in case of insured losses.

Auditors and tax authorities use gross profit ratio to judge the accuracy of the accounting records.

Gross profit ratio of is remain same as previous year. The year 2007 & 2008, the gross profit of the company
was remaining constant over the years i.e. 55%.

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Expenses/Revenue Ratio = Specified Expenses x 100

Revenue

2007 = 693 x 100

2100

33%

2008 = 713 x 100

2300

= 31%

Selling, distribution and administrative expenses are indirect expenses and should take into account for
determining the expenses ratio. The expense ratio of the hospital is decrease over the previous year.
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Profit from Operation Percentage = Profit from Operation x 100

Revenue

2007 = 462 x 100

2100

= 22%

2008 = 552 x 100

2300

= 24%

The operating profit ratios establish the relationship between operating profit and net sales or revenue earned. In
other word, the operating profit ratio is calculated by diving operating profit by sales.

Operating activities of a business are its primary revenue producing activities. Operating profit ratio allows user
to assess the impact of operating activities on the profitability of the firm. This ratio indicates the operating
efficiency of the business. A higher ratio is desirable as it indicates that there is more income from operation
activities.

The operating profit shows a slight increase. Industry average operating profit margin is 21.4%. Operating profit
during the year 2007 was 22%, which increase to 24% in the year 2008. Thus, company operating performance
is good when compared with other industry.

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Returns on Capital Employed = Profit from operation x 100

Capital Employed

2007 = 462 x 100

5790

= 7.97%

2008 = 552 x 100

5334

= 10.34%

Traditionally, capital employed has been considered as long – term funding. This ratio assesses the returns
earned by both equity and debt. It indicates how well the firm utilizes its assets base.
This ratio measured the ability of the firm to reward providers of long – term funds. This ratio also helps to
attract future providers of capital. This is one of the most important ratios used for measuring the overall
efficiency of a firm. The primary objective of the business is to maximize its earnings; this ratio indicates the
extent to which this primary objective of business is being achieved. This ratio is of great importance to the
present and the prospective shareholder as well as the management of the company. It reveals how well the
resources of the firm are being used; higher the ratio, better are the result.

The returns on capital employed ratio have increased from 7.97% in the year 2007 to 10.43% in the year 2008.
The average industry returns on capital employed ratio is 9.4% in the year 2007 & 9.6% in the year 2008
respectively. The earlier this ratio of the company was too low but in the next year it performs very well. In the
year 2008 it is more than the industry average. The company’s overall performance is to a certain extent is very
excellent.

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Net Profit Percentage Net Profit x 100

Revenue

2007 = 462 x 100

2100

= 22%

2008 = 552 x 100

2300

= 24%

The net profit ratio establishes the ratio between net profits (after taxes) and sales, ad indicates the efficiency of
the management in manufacturing, selling administrative and other activities of the firm. It gives the measure of
net income each rupee of sales generates. This ratio gives overall measure of the firm’s profitability.

The two basic element of the ratio are net profit and sales. The net profit will be obtained after deducting
income tax. The ratio is very useful because if the profit is not sufficient, the firm shall not be able to achieve
satisfactory return on its investment.

The net profit has increased from 22% in the year 2007 to 24% in the year 2008. The average industry net profit
ratio is 21.3% in the year 2007 & 21.4% in the year 2008 respectively. It is more than the industry average. The
company’s overall performance is quite good.

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Returns on Equity = Profit after Tax x 100

Equity
 2007 = 462 x 100
1000

= 46.20%

2008 = 552 x 100

1100

= 50.18%

Since from the point of view of equity shareholder, preferred stock has a fixed claim to the net assets of the
company, this ratio is computed by dividing the income after tax less preference dividend by total shareholder’s
equity less preference stock.

This ratio focuses on the efficiency of the company in earning profit on behalf of its equity shareholder, by
relating the profit to the total amount of equity shareholder’s fund employed in the company. The two element
of the ratio are net profit and equity shareholder’s funds.

The returns on shareholders’ investment should be compared with the return of other similar business in the
same industry or likewise, the trend ratio can also be calculated for a number of years to get an idea of the
prosperity, growth in the companies’ profitability and efficiency, whether the returns are higher or not

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Earnings per Share = Profit after Tax

Number of issued
shares

2007 = 462
1000

= 0.46

2008 = 552
1100

= 0.50

The EPS is a good measure of the profitability. The EPS when compared with the EPS of the similar companies
gives a view of the comparative earnings or earning power of a firm. EPS when calculated for a number of
years indicates whether earning power of the company has increased over the years or not. It also helps in
calculating market price of the share.

EPS is the most widely available and commonly use performance statistical ratio in all publicly traded
companies. It is used by investors to measure the operating performance for valuation purpose either individual
or together with market price. Analysis are required to exercise caution comparing the EPS of one company
with another since it may be misleading when two companies, which are identical in the all respect except the
number of share issued, are compared.

The EPS of the company is increase from 0.46 in the year 2007 to 0.50 to 2008. So it is assume that the
company performs very well, in terms of EPS. It gives fair returns to shareholder also.

Liquidity Ratio
 Current Ratio = Current Assets
Current Liabilities

2007 = 837
465

= 1.8

2008 1045
475

= 2.2

This is the most important liquidity ratio. It indicates the firm’s ability to pay its current liability out of its
current assets. It shows the firm’s commitment to meet its short – term liabilities (current liabilities). This ratio
indicates the extent of “margin of safety” or “cushion” available to the current creditors.

Current assets are those assets which can be converted into cash within an accounting year. Current liability are
the liabilities which are payable within an accounting year. Traditionally, a current ratio of 2:1 i.e. two rupees of
current assets for every rupee of current liabilities has been considered adequate. The larger the current ratio,
the greater is the protection available to short – term creditors.

The current ratio has increased considerably from 1.8 in 2007 to 2.2 in 2008. To have a better understanding of
the liquidity position of the company let us also compute quick ratio.

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Quick Ratio/Acid Test = Quick Assets

Current Liabilities

2007 = 418
465

= 0.898924731

2008 = 523
475

= 1.101052632

This ratio is a supplementary ratio to give double assurance as to the soundness of the current financial position
of a business. This ratio is calculated by dividing the quick assets by current liability. It represents the number
of times current liability are covered by quick assets or the number of rupees of liquid assets relative to total
current liability. It indicates the firm’s ability to pay its current liability out of its most liquid assets. Liquid
assets are the assets which can be converted into cash immediately without any loss and include cash, bank
balance, bills receivable, sundry debtors, short – term investment.
A quick ratio of 1:1 is considered fairly good and ideal. It is consider wise to maintain the liquid asset equal to
liquid liabilities at all times. However, a comparison of the firm’s past quick ratio, a comparison with major
competitors and industry average would be more meaningful.

The company’s quick ratio has increased considerably. The ideal quick ratio is 1:1. As against its last year
position, which has stable, as company’s liquidity position is sufficient to meet its short – term obligation, in
2008 it has improved.

This ratio has increased from 0.89 in the year 2007 to 1.10 in the year 2008. The average industry ratio is 0.90
in the year 2007 & 1.00 in the year 2008 respectively. It is more or equal to the industry average. The
company’s overall performance is quite fine.

When analysts view the liquidity of the firm from an extremely conservative point of view they use absolute
liquid ratio.

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Use of Resources
 Inventory Turnover (Days) = Inventories x 365 Days
Cost of Sales

2007 = 419 x 365 Days

945

= 161 Days

2008 = 522 x 365 Days

1035

= 184 Days

Every firm has to maintain a certain level of inventory of finish goods so as to meet its business requirements.
The level of inventory should neither be too high nor too low. Keeping more inventory implies,

• Unnecessary blockages of capital, which can otherwise be profitability, used somewhere else.

• Over – stocking require more space, thus more rent will be paid.

• Chances of obsolescence of stock are high since consumers prefer the goods of latest design.

• Slow disposal of stock will mean slow recovery of cash, which adversely affects liquidity.

It is advisable to dispose of inventory as early as possible. On the other hand, too low inventory may mean loss
of business opportunities. The inventory turnover ratio refers to the number of times the stock of finish goods is
turned over as sales, or sold or replaced. The inventory turnover ratio evaluates the efficiency with which a firm
is able to manage its inventory.

The inventory turnover ratio is slightly decreased this year. Generally, the inventory turnover ratio is very high
in the healthcare industry.

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Receivable Collection Period (Days) = Trade Receivable x 365 Days

Revenue

2007 = 356 x 365 Days

2100

= 63 Days

2008 = 406 x 365 Days

2300

= 64 Days
The average collection period represents the average number of days for which a firm has to wait before their
receivables are converted into cash. It measures the quality of debtors. Generally, the shorter the average
collection period the better is the quality of debtors as a short collection period implies quick payments by
debtors. Similarly, a higher collection period implies inefficient collection performance, which in turns
adversely affects the liquidity or short term paying capacity of a firm out of its current liabilities. Moreover,
longer the average collection periods, larger are the chances of bad debts.

Average collection period is increased from 63days and 64days. It means the company’s performance in
collection period is increased. Debtors are less liquid now compare to previous year.

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Payable Payment Period (Days) = Trade Payable x 365 Days

Purchase

2007 = 254 x 365 Days

945

= 98 Days

2008 = 305 x 365 Days

1035

= 108 Days

In course of business operation, a firm has to make credit purchase and incur short – term liabilities. The
supplier of goods i.e. creditors is naturally interested in finding out how much time the firm is likely to take in
replying its trade creditors. From the business point of view, it represents cheap source of funds as a mean of
finance for most businesses. Consequently, many firms exploit it potential to the full.

Average payments period is a measure of length of time taken by a company to pay its customer. This period
represents effectively free finance to the company. Hence, companies generally tend to extent this period
compromising other considerations such as its payments reputation and legal requirements.

This ratio has increased from 98days in the year 2007 to 108days in the year 2008. Due to payments Reputation
Company can exploit its full potential to extent the credit period. The company’s overall performance is quite
fine.

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Assets Turnover Ratio = Revenue

Net Assets

2007 = 2100
 5790

= 0.36

2008 = 2300
5334

= 0.43

This ratio explains whether the assets are finance out of long – terms or not; or part of sales is used for
purchasing the assets.

It is prudent the assets and core working capital of a company is to be covered by long – term funds or sales. If
the ratio exceeds 1, it implies some of assets were financed by short – term borrowing and current liabilities.

Financial Position
Interest Cover = Profit from Operation
 Finance Cost

2007 = 462
693

= 0.67

2008 = 552
713

= 0.75

This ratio measures the cover or safeguard that exists for the lenders of debts. This ratio reveals the debts
servicing capacity of the firm. Lenders check this ratio before deciding on lending the money to the firm. Hence
this is an important ratio from the lenders’ point of view. It measures the adequacy of profit to cover the interest
i.e. whether the business earns sufficient profit so as to pay the interest charges periodically.

The rule – the higher the ratio, better for lenders and more secured their periodical interest income. If the firm
has good coverage of interest obligation, it can be said that the firm will be able to refinance its principal as and
when it becomes due. A relative high, stable coverage ratio indicates a good record.

Interest coverage ratio increased from 0.67 during the 2007 as against the earlier coverage of 0.75 during 2008.
This indicates an decrease in insecurity among creditors.

Gearing Ratio:

Gearing Ratio = Debts x 100

Capital Employed

2007 = 2490 x 100

5790

= 43%

2008 = 1654 x 100

5334

= 31%

This is the most commonly used measured which quantifies the relationship between fixed return bearing debs
– to – equity. It quantifies the relationship between long – term sources of finance bearing fixed costs (loans,
debentures, bonds and preference shares) to equity (bearing variable cost).

Fixed interest – bearing securities include preference share capital, debentures and long – term loans, which
carry fixed rate of dividend and interest.
Higher this ratio the weaker the company is perceived to be since there is high fixed commitment on its profit
before equity interest can be satisfied. The standard ratio is 1. If the ratio is 1, then firm is said to be evenly
geared. If the ratio is more than 1 then the firm is highly geared. i.e. major portion of funding is in the form of
fixed interest – bearing. If the ratio is less than 1, then the firm is low geared.

Company’s capital gearing ratio is decreased from 43% in the year 2007 to 31% in the year 2008. It indicates
that the company has decreased its fixed bearing interest securities. Ratio like debts – equity ratio, and capital
gearing ratio indicates that the company is depending more on their internal resources than outside resources.