Profitibility Ratio Essay

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PROFITABILITY RATIO Profitability ratios measure a company’s ability to generate earnings relative to sales, assets and equity. These ratios assess the ability of a company to generate earnings, profits and cash. They highlight how effectively the profitability of a company is being managed. Profitability measures are important to company managers and owners alike. Profitability ratios show a company's overall efficiency and performance. Common examples of profitability ratios include Profit margin on sales, Basic earning power, Return on assets and Return on equity. 1. Profit Margin on Sales A measure of how well a company controls its costs. The higher the profit margin is, the better the company is thought to control costs. = Net income available to common stockholders Sales Year 2009 Year 2010 = (530,452) = 232,977 2,971,460 3,258,319 = -17.9% = 7.15% In year 2009, for every RM 1.00 of sales, Comapny A have negative 17.9 cent of profit and in year 2010, for every RM 1.00 of sales, Company A have 7.15 cent of profit. 2. Basic Earning Power The basic earning power ratio compares earnings apart from the influence of taxes or financial leverage, to the assets of the company. The ratio that tells how profitable an asset will be to the firm. = . EBIT . Total Assets Year 2009 Year 2010 = (161,229) = 594585 3,874,077 2,623,276 = -4.16% = 22.67% In year 2009, for every RM 1.00 of total assets produce negative 4.16% earning before tax and in year 2010, for every RM 1.00 of total assets produce 22.67% earning before tax. 3. Return on Total Assets An indicator of how profitable a company is relative to its total assets. Return on Assets gives an idea as to how efficient management is at using its assets to generate

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