PART II – RATIO ANALYSIS 2.0 PROFITABILITY ANALYSIS An entity’s ability to generate profit and return on investment is one of the prime indicators of its financial health (Birt et al., 2010). It is the fact that without profit, a company will not be able to attract outside capital which could have a great impact on its operations and investment activities. In this connection, the owners, creditors and management often pay close attention to boosting profits because of the importance that the market places on the earnings. In the case of Dialog Group, several ratios are used to measure its operating performance in term of ability to generate profit as shown in Table 2.1. Table 2.1: Profitability Ratios of Dialog Group for the Financial Year 2010 and 2011 Ratio Return on Equity (ROE) Return on Assets (ROA) Gross Profit Margin Profit Margin Cash flow to sales ratio 2010 25.34% 18.44% 12.35% 13.36% 17.63% 2011 28.28% 20.61% 15.23% 16.84% 13.92% Changes + 2.94% + 2.17% + 2.88% + 3.48% - 3.71%
Undeniably, the profitability of Dialog Group is determined by two main factors which are the profit margin and the speed of turnover. Referring to Table 2.1, the company has been able to improve its ROE from 2010 to 2011 in which an investment of RM 1 of shareholder’s equity in 2011 returned 28.28 cents of earnings available for distribution to shareholders. This figure was 2
only 25.34 cents in year 2010. One of the main contributors to this improvement comes from the significant increase in the net profit generated by the company in 2011 as compared to 2010. On the other hand, Dialog Group generated 18.44 cents of EBIT per Ringgit of investment in assets in 2010 which was increased by 2.17% to 20.61 cents in year 2011. The improvement in the ROA has also contributed to the higher ROE. From Dialog’s Income Statement, the entity’s marketing and distribution costs, administration expenses, finance cost and other operating expenses has generally increased in relative to sales revenue. All expense ratio of the company has grown except for operating expenses which experienced a dramatic decrease by almost 50% in year 2011 as shown in Table 2.2. This suggests that more cost control measures must be taken into account to eliminate all unnecessary expenses which will enhance the profitability level of the company. This could be achieved as the company has...