Profitability ratios: measure how good management is at turning efforts into profits RATIO| 2006| 2007|
Net profit margin (Net profit ÷ Sales)| 10.03%| 10.97%| Gross profit margin (Gross profit ÷ Sales)| 22%| 23.6%| Operating profit margin (EBIT ÷ Sales)| 18.32%| 20.32%| Pretax margin (PBT ÷Sales)| 16.05%| 17.54%|
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An analysis of the above profitability ratios shows that 2007 was an improvement in profitability (though marginal) compared to the previous year (2006). Net profit margin, which is the ratio of net income (from continuing operations) to sales increased from 10.03% in 2006 to 10.97% in 2007. Gross profit margin recorded a growth from 22% in 2006 to 23.6% in 2007. Operating profit margin also increased from 18.32% to 20.32% for the two years under review. Liquidity ratios: these ratios are used to measure a company’s ability to settle short term obligations as they fall due RATIO| 2006| 2007|
Current Ratio (current assets ÷ current liabilities)| 3.42| 3.01| Quick (Acid Test) Ratio [(cash + marketable securities + receivables) ÷ current liabilities]| 1.72| 1.53| Cash Ratio| 0.18| 0.16|
Safal Enterprises’ liquidity ratios however depict a different story for the two years. Liquidity ratios deteriorated over the two years. Current asset fell from 3.42x in 2006 to 3.01x in 2007. Quick ratio, as well as cash ratio (both conservative measures of liquidity) also fell in 2007, from 1.72 to 1.53 and 0.18 to 0.16 respectively. Solution 5
By utilizing common-size balance sheet, the financial positions of the two firms can be compared if they are in the same industry. In that case, all the balance sheet items are expressed as a percentage of total assets. This makes comparison between the two firms more meaningful. For instance, if we want to compare which of the two firms is more liquid using common-size balance sheet, we get 3.12% and 6.7% for Gloria Ltd and Victoria Ltd respectively....