Determinants of Profitability: A Case Study of Listed Manufacturing Companies

in Sri Lanka
A.Nishanthini & Nimalathasan, B
University of Jaffna, Jaffna, Sri Lanka
bnimalathasan@yahoo.com

ABSTRACT

The main objective of the study is to determine the profitability of listed manufacturing companies in
Sri Lanka. In order to meet the objectives of the study, data were collected from secondary sources
mainly from financial report of the selected companies, which were published by Colombo stock
exchange in Sri Lanka. The results revealed that the profitability of manufacturing companies is less
satisfactory. On the basis of result and analysis, selected manufacturing companies has different
ranking based on each profitability indicators such as Gross Profit Ratio (GPR), Operating Profit
Ratio (OPR), Net Profit Ratio (NPR), Return on Investment (ROI), and Return on Capital Employed
(ROCE). Based on the Gross Profit Ratio, Operating Profit Ratio, Net Profit Ratio, ROYAL
CHERAMIC PLC is at first whereas CHEVRON LUBRICANTS PLC is at first based on ROI,
ROCE. Outcome of the study is beneficial to academicians, policy makers, practitioners and so on.

Introduction Profit and profitability are two different terms.

Profit means as an absolute measure of earning
Profit is the primary objective of a business capacity, while profitability is relative measure
(Nimalathasan, 2009). In point of view of the of earning capacity. Profit is defined by Iyer
heavy investment which is necessary for the (1995) as “excess of return over outlay”
success of most enterprises. Profit in the (Nimalathasan, 2009) while profitability is
accounting sense tends to become a long term defined as “the ability of given investment to
objective which measures not only the success earn a return from its use’. The words
of the product, but also of the development of profitability is composed of two words profit
the market for it. It is determined by matching and ability. The word profit has already been
revenue against cost associated with it. Only defined but the meaning of profit differs
those costs are placed against revenue, which according to the use and purpose of the
have contribution in the generation of such enterprise to earn the profits. Thus the word
revenue. An enterprise should earn profits to profitability may be defined as the ability of
survive and grow over a long period of time. It given investment to earn a return from its use.
provides evidence concerning the earnings
potential of a company and how effectively a Profitability ratios measure the firm’s ability to
firm is being managed. If the enterprise fails to generate profits and central investment to
make profit. Capital invested is eroded and if security analysis, shareholders, and investors.
this situation prolongs the enterprise ultimately Profitability is the primary measure of the
ceases to exist. overall success of enterprise. The analysis of
profitability ratios is important for the

42
Determinants of Profitability: A Case Study of Listed Manufacturing Companies in Sri Lanka

shareholders, creditors, prospective investors, collusion story about why concentrated

bankers and government alike. industries had higher profit rates than other
industries, and also he found that large firms in
Literature Review general were higher profitable than small firms
Nimalathasan (2009) mentioned that the profit is within the same industry
the primary objective of a business, which Velnampy & Nimalthasan (2007) pointed out
measures not only the success of a product, but that sales are positively associated with
also of the development of the market for it. profitability ratios except return on investment,
Further profit is the report card of the past, the and numbers of depositors are negatively
inventive gold star for the future. correlated with the profitability ratios except
Weidenfeld & Nicholson (1970) concerned that return equity, likewise number of advances to
the profit as a reward to owner of the capital but the return on investment, and return on average
with the return to capital as an objective of a assets in Bank of Ceylon. Sexton & Kasarda
firm’s activities. Velnamby & Nimalathasan (2000) found that firm profitability was
(2009) noticed the profitability will provide correlated with sustainable growth, while
more accurate view of the firm’s performance. Chandler and Jensen (1992) found that sales
Pandy (1979) indicated that recent experience in growth and profitability were not correlated.
countries with totally planned economies Based on the above literatures, we can say that
indicated that economists are probably right in various studies have been done on this area, but
emphasizing the importance of overall a detailed and comprehensive study has not yet
profitability as a criterion for the efficient been conducted in manufacturing companies in
operation of an enterprise. Sri Lanka. Hence, the present study is initiated
Weston (1978) declared that the profit is use to to determine the profitability of listed
test the efficiency and use to measure the control manufacturing companies in Sri Lanka with five
and worth of the investment to the owners, (05) year accounting period from 2006 to 2010.
margin of safety to the creditors, source of
Objectives
extreme benefits to the employees, to the
Government a measure of taxable capacity and The main objective of the study is to determine
the basis of legislative action, to the country the profitability of manufacturing companies. To
profits are an index of economic progress, achieve main objective, the following specific
national income generated and rise in the objectives are taken for the study purpose.
standard of living. • To compare the profitability
• To recognize the profitability.
On the other hand, welstedt (1980) in his book
entitled “state manufacturing enterprises in a Material and Methods
Mixed Economy: Turkish case stated that
profitability of an enterprise can be ascertained, Scope
if profit is analyzed in terms of sales and The scope of the study is listed manufacturing
investment. Schmalensee (1987) mentioned that companies on Colombo stock exchange (CSE),
to determinacy of systematic changes in intra- Sri Lanka. Thirty one companies are listed under
industry profitability occurred over time so as to manufacturing sectors. Hence, out of thirty one,
distinguish between an efficiency story and
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Journal of Management, Volume VIII No. 1

only ten companies are selected for the study Results and Discussion
purpose as purposively such as:
Comparison of profitability of the
1. ABANS ELECTRICALS PLC manufacturing companies is measured in terms
2. ACME PRINTING & PACKING PLC of the important ratios such as
3. CENTRAL INDUSTRIAL PLC
4. ACL CABLE PLC Gross Profit Ratio (GPR)
5. ACL PLASTIC PLC Operating Profit Ratio (OPR)
6. LANKA ALUMINUM INDUSTRIAL
PLC Net Profit Ratio (NPR)
7. CHEVRON LUBRICANTS LANKA
Return on Investment (ROI)
PLC
8. KALANI CABLES PLC Return on Capital Employed (ROCE)
9. LANKA CERAMIC PLC
10. ROYAL CERAMIC LANKA PLC. Gross Profit Ratio

Data sources Gross profit percentage that can be earned from

the net sales. That is the relationship between
In order to meet the objectives of the study, data the sales and the gross profit. It depicts the
are collected from secondary sources mainly purchasing efficiency of an enterprise. The
from financial report of the selected companies, higher the gross profit ratio, the better the
which were published by Colombo stock purchasing efficiency of the enterprise and also
exchange in Sri Lanka. a high ratio of gross profits to sales is a sign of
good management as it implies that the cost of
Measures
production of the firm is relatively low. But a
Secondary data are used to measure the relationship low gross margin is definitely a
indicators which are related to profitability. Here danger signal. The gross profit ratios of the
indicators of profitability such as Gross profit companies for the study period have been shown
ratio(GPR); Operating profit ratio (OPR); Net in the table 1.
profit ratio (NPR); Return on investment (ROI);
Table-1 shows that the gross profit of the
Return on equity (ROE); Return on capital
ABANS, ACME, CENTRAL INDUSTRIAL,
employed (ROCE) are taken into account for the
ACL CABLE, ACL PLASTIC, LANKA
study.
ALUMINIUM, CHEVRON LUBRICANTS,
Reliability and validity of the Data KALANI KEBLES, LANKA CHARAMIC, and
ROYAL CHERAMIC during the period 2006 to
Secondary data for the study are drawn audit 2010. This showed an upward trend of ABANS,
accounts (i.e., income statements and balance ACME, CENTRAL INDUSTRIAL, CHEVRON
sheets) of the concerned companies therefore; LUBRICANTS, LANKA CHERAMIC, and
these data may be considered reliable for the ROYAL CHERAMIC during the period from
purpose of the study. 2007 to 2010; at the same time rest of the
companies’ shows down ward and flexible
trend. It is not a good sign for the company.

44
Determinants of Profitability: A Case Study of Listed Manufacturing Companies in Sri Lanka

Table 1: Gross Profit Ratio of the selected Companies (in %)

NAME OF THE COMPANY 2006 2007 2008 2009 2010 TOTAL AVG SD
ABANS 11.33 9.74 11.31 11.83 13.78 57.99 11.60 1.45
ACME 21.08 21.4 23.18 25.3 24.01 114.97 22.99 1.77
CENTRAL INDUSTRIAL 25.48 23.94 26.89 26.15 30.00 132.46 26.49 2.24
ACL CABLE 25.13 26.72 17.36 14.64 15.8 99.65 19.93 5.58
ACL PLASTIC 12.13 7.95 9.14 7.93 16.06 53.21 10.64 3.48
LANKA ALUMINIUM 8.99 9.72 8.34 9.17 10.05 46.27 9.254 0.66
CHEVRON LUBRICANTS 26.47 23.87 23.89 35.62 32.15 142.00 28.40 5.26
KALANI CABLES 20.31 23.69 16.46 16.56 20.93 97.95 19.59 3.09
LANKA CHERAMIC 25.47 24.56 23.01 23.17 24.33 120.54 24.11 1.02
ROYAL CHERAMIC 40.25 40.06 42.37 43.92 47.59 214.19 42.84 3.10

This is perhaps due to competition in the market borrowing funds and taxes paid to the
and slow growth in the economy of the country. government. Therefore it represents the overall
The average gross profit ratio of ROYAL earnings of an enterprise and one can get a clear
CHERAMIC is 42.84%, which is high idea about the efficiency of an enterprise from
percentage compare with other companies, its operating profit ratio. The operating profit
which shows about the companies’ high ratio, the better is the overall efficiency of the
performance of gross profit earning, on the other enterprise. Weaton & Brigham (1969) suggested
hand ABANS, ACL PLASTIC, ACL CABLE, that 4% - 6% of operating profit is considered
LANKA ALUMINIUM and KALANI norm for the purpose of comparison and control.
CABLELS have to improve their performance The operating profit ratios of the sample
immediately in future. ACL CABLE, companies are shown in table-2.
CHEVRON LUBRICANTS have highest
variation of gross profit over the years (highest According to the table-2, many companies out
variation over the year is 5.59%). It is the good of selected company’s operating profit other
sign for these companies, because whish is in than LANKA CHERAMIC, CENTRAL
safety position that mean both companies INDUSTRIAL showed a downward and more
showing increasing trend after 2008, which complex flexible trend. This showed effort of
speaks about the stability of gross profit earning the management to control operating expenses
of this companies. had been more or less successful, but in
LANKA CHERAMIC’S operating profit
(B). Operating Profit Ratio suddenly decrease from 2007 to 2008, and then
showed upward from 2008 to 2010, at the same
Operating profit ratio is important ratios that time CENTRAL INDUSTRIAL showed an
explain the changes in the net profit margin increasing trend from 2006 to 2008 then
ratio. Operating profits refers to the profit of an suddenly decrease to 9.63% in 2009 after then in
enterprise. This is obtained after deducting all 2010 increase to 12.99% but all the companies
operating expenses from gross profit. Operating average operating profit ratios highest
expenses include all administration, selling and percentage than suggested in above (4%-6%).
distribution expenses but not the expenses ACL CABLE shows the highest standard
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Journal of Management, Volume VIII No. 1

deviation of 6.85% of operation profit than other deviation of operation profit. It indicates
companies operating standard deviation. And extremely desirable position. It helps to
also CHEVRON LUBRICANTS, LANKA ascertain the operating efficiency of the
CHERAMIC, RAYAL CHERAMIC, ACL management.
PLASTIC, ACME indicate convenient standard

Table 2: Operating Profit Ratio of the selected Companies (in %)

NAME OF THE
2006 2007 2008 2009 2010 TOTAL AVG SD
COMPANY
ABANS 4.34 4.84 5.16 4.67 8.44 27.45 5.49 1.68
ACME 11.85 12.55 10.67 15.12 0.89 51.08 10.22 5.46
CENTRAL INDUSTRIAL 9.76 9.85 10.03 9.63 12.99 52.26 10.45 1.43
ACL CABLE 19.34 20.21 10.73 6.05 6.44 62.77 12.55 6.86
ACL PLASTIC 11.68 6.63 9.23 7.72 15.67 50.93 10.19 3.61
LANKA ALUMINIUM 4.34 5.57 4.65 4.48 4.53 23.57 4.71 0.49
CHEVRON LUBRICANTS 16.96 15.94 15.56 25.83 23.94 98.23 19.65 4.86
KALANI CABLES 12.79 16.42 7.41 6.79 9.11 52.52 10.50 4.05
LANKA CHERAMIC 14.21 15.56 11.26 13.38 17.15 71.56 14.31 2.23
ROYAL CHERAMIC 23.69 22.22 28.56 25.63 31.08 131.18 26.24 3.60

Net Profit Ratio profitability and is very useful to proprietors.

There is also no fixed norm of judging the net
This ratio shows the final result or net profit profit ratio. But Mohsim (1970) considered that
after making a sale. The earnings in terms of a profit margin ratio which 4% to 6% is termed
sales can be assesses through the profit margin as the standard norm for any industrial
ratio which is calculated by dividing the enterprise. The net profit ratios of the sample
earnings before interest and taxes by sales. This companies are shown in table-3.
ratio is widely used as measure of overall
Table 3: Net Profit Ratio of the selected Companies (in %)

Name of the company 2006 2007 2008 2009 2010 TOTAL AVG SD
ABANS 1.38 1.2 0.39 1.36 2.79 7.12 1.42 0.86
ACME 2.23 2.98 -0.1 -0.67 0.84 5.28 1.05 1.54
CENTRAL INDUSTRIAL 6.15 5.38 5.7 5.04 7.68 29.95 5.99 1.02
ACL CABLE 12.43 11.33 3.69 2.02 0.76 30.23 6.05 5.44
ACL PLASTIC 7.41 2.92 2.37 2.76 9.64 25.1 5.02 3.30
LANKA ALUMINIUM 1.17 2.4 1.47 1.35 1.31 7.7 1.54 0.49
CHEVRON LUBRICANTS 12.59 10.48 10.97 17.2 15.85 67.09 13.42 2.98
KALANI CABLES 10.23 10.64 3.86 16.56 4.26 45.55 9.11 5.25
LANKA CHERAMIC 8.57 10.5 8.16 6.25 17.15 50.63 10.13 4.207
ROYAL CHERAMIC 24.03 12.68 17.58 13.84 21.66 89.79 17.96 4.88

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Determinants of Profitability: A Case Study of Listed Manufacturing Companies in Sri Lanka

According to the table-3 the net profit ratio of Return on Investment

CENTRAL INDUSTRIAL and ACL PLASTIC
showed increasing trend during the year from The most commonly used measure of
2007 to 2010. At the same time ACL CABLE profitability is to relate the profit output with the
and LANKA ALUMINIUM showed decreasing capital input and thus compute the rate of return
trend. On the other hand other companies within on capital investment. This rate is the end profit
selected companies shows flexible trend from of a series of quantitative variables representing
2006 to 2010, even though average net profit different interconnected and interdependent
ratio of ROYAL CHERAMIC was 17.96%. It factors of business operations. The return on
was a higher value compare than others and also investment is equal to the profit margin on sales
standard deviation of 4.88% indicate extremely multiplied by the investment. Weston &
attractive position. ACL CABLE’s standard Brigham (1969) suggested that a return of 13%
deviation was 5.44% while showing increasing to 15% on net worth should be considered as
trend over the years it indicates that the standard for industrial enterprises. The return on
companies stable position. However other investment of the selected companies is given in
companies have to improve their performance in table -4.
future.

Table 4: Return on Investment of the selected Companies (in %)

NAME OF THE COMPANY 2006 2007 2008 2009 2010 TOTAL AVG SD
ABANS 8.69 9.38 9.32 8.07 13.34 48.80 9.76 2.07
ACME 13.52 14.24 8.49 13.70 0.82 50.77 10.15 5.71
CENTRAL INDUSTRIAL 43.19 16.01 16.46 13.51 16.49 105.66 21.13 12.39
ACL CABLE 19.46 24.67 13.07 6.89 5.80 69.89 13.98 8.09
ACL PLASTIC 15.25 7.23 10.27 9.03 18.96 60.74 12.15 4.83
LANKA ALUMINIUM 10.30 14.8 12.33 12.04 9.89 59.36 11.87 1.95
CHEVRON LUBRICANTS 37.60 48.18 43.66 88.68 67.18 285.3 57.06 20.85
KALANI CABLES 14.60 23.19 9.77 9.77 11.64 68.97 13.79 5.61
LANKA CHERAMIC 14.61 15.70 11.96 12.41 15.92 70.6 14.12 1.84
ROYAL CHERAMIC 16.65 14.91 17.47 15.47 21.33 85.83 17.16 2.59

Above table-4 shows that ABANS, ACME, It was high percentage with compare than other
ACL PLASTIC, LANKA ALUMINIUM were companies. It expresses the companies’
not satisfactory level during the period from volatility position. It is the noteworthy in the
2006 to 2010, which showed a flexible trend. It stability position.
indicates remarkable in the stability position of
these companies. From the above table we can Return on Capital Employed
found that all companies ROI’s trends are not in This is an important ratio. It shows how much
a stable position out of LANKA CHERAMIC return is being generated for every rupee
and ROYAL CHERAMIC. CHEVRON invested in the business. This is calculated by
LUBRICANTS’s standard deviation is 20.85%. dividing net profit after interest and taxes by
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Journal of Management, Volume VIII No. 1

capital invested and quotient is expressed in capital employed may be considered standard
terms of percentage. Capital employed norm for industrial undertaking. Return on
represents the sum of net tangible fixed assets capital employed of selected companies is given
and net current assets. A return of 1% to 12% on in table-5.
Table 5: Return on Capital Employed of the selected Companies (in %)

NAME OF THE
2006 2007 2008 2009 2010 TOTAL AVG SD
COMPANY
ABANS 26.22 46.82 31.07 31.26 83.98 219.35 43.87 23.73
ACME 50.39 45.5 19.59 34.32 2.27 152.07 30.41 19.69
CENTRAL
INDUSTRIAL 20.45 23.98 19.94 17.32 19.43 101.12 20.22 2.41
ACL CABLE 38.78 52.36 29.15 13.68 11.32 145.29 29.05 17.23
ACL PLASTIC 18.11 11.15 20.19 15.08 23.89 88.42 17.68 4.86
LANKA ALUMINIUM 24.33 30.41 30.98 25.21 26.67 137.6 27.52 3.02
CHEVRON
LUBRICANTS 74.36 81.5 64.38 91.75 91.34 403.33 80.66 11.64
KALANI CABLES 25.2 35.53 17.28 13.6 19.93 111.54 22.30 8.51
LANKA CHERAMIC 56.72 60.85 18.7 20.49 23.19 179.95 35.99 20.92
ROYAL CHERAMIC 23.92 21.61 24.56 23.74 30.36 124.19 24.84 3.28

From the table-5 it is found that ROCE of except average ROI and average ROCE. And
selected companies of various years was not also CHEVRON LUBRICANTS shows higher
satisfactory but it showed a decreasing trend of industry average than other companies’ industry
ACL CABLE, ACME for the period from 2009 average in average ROI and average ROCE.
to 2010 and an upward trend in other companies. CHEVRON LUBRICANTS should be
Still all selected companies have not maintained considered as satisfactory as its indicators of
a satisfactory rate of ROCE. According to the profitability higher than the industry average.
variation all companies shows diverse rate of ACL PLASTIC and LANKA ALUMINIUM
variation so, companies may be considered have not been able to attain the industry average.
tolerable. It is not a good one to these On the other hand another companies out of
companies, to prevail over these; the companies CHEVRON LIBRICANTS from selected
should take good trial. Then only they can companies, have not been able to attain the
improve in future. industry average in any one or more than one
profitability indicators. But these companies
Table-6 shows that average of profitability have succeeded to attain the standard norm for
indicators for selected companies. ROYAL any one or more than one ratios, as a result its
CERAMIC indicates high percentage of industry profitability may be considered to some extent
average than other companies’ industry average satisfactory.

48
Determinants of Profitability: A Case Study of Listed Manufacturing Companies in Sri Lanka

Table 6: Average Profitability Ratio of the Selected Companies (in %)

AVERAGE AVERAGE AVERAGE AVERAGE

NAME AVERAGE
GROSS OPERATING NET RETURN ON
OF THE RETURN ON
PROFIT PROFIT PROFIT CAPITAL
COMPANY INVESTMENT
RATIO RATIO RATIO EMPLOYED
ABANS 11.59 5.49 1.42 9.76 43.87
ACME 22.99 10.21 1.05 10.15 30.41
CENTRAL INDUSTRIAL 26.49 10.45 5.99 21.13 20.22
ACL CABLE 19.93 12.55 6.04 13.97 29.05
ACL PLASIC 10.64 10.18 5.02 12.14 17.68
LANKA ALUMINIUM 9.25 4.71 1.54 11.87 27.52
CHEVRON
28.40 19.64 13.41 57.06 80.66
LUBRICANTS
KALANI CABLES 19.59 10.50 9.11 13.79 22.31
LANKA CHERAMIC 24.11 14.31 10.12 14.12 35.99
ROYAL CHERAMIC 42.84 26.23 17.95 17.16 24.83
INDUSTRY AVERAGE 21.58 12.43 7.16 18.18 33.25

Conclusion References

According to Walker (1974) the return on Annual Report (2010), Abans Electricals Plc.
Investment should be considered as the best
measure of profitability, father In view of above, Annual Report (2010), Chevron Lubricants
it can be concluded that the profitability of Lanka Plc.
manufacturing companies is less satisfactory.
On the basis of result and analysis, selected Annual Report (2010), ACME Printing &
manufacturing companies has different ranking packing Plc.
based on each profitability indicators such as
GPR, OPR, NPR, ROI, and ROCE? Based on An inter & intra comparison of AMBEE & IBN
the GPR, OPR, NPR, ROYAL CHERAMIC is SINA Companies Ltd,
at first whereas CHEVRON LUBRICANTS is
at first based on Return on Investment, Return Annual Report (2010), ACL Cables Plc.
on Capital Employed.
Annual Report (2010), ACL Plastic Plc.
Limitation of the study

The study covered 10 manufacturing companies, Annual Report (2010), Central Industries Plc.
which is listed under CSE in Sri Lanka, in order
to measure and compare the profitability. Annual Report (2010), Kalani Cables Plc.

The study has been conducted during the period Annual Report (2010), Lanka Aluminum
from 2006 to 2010. Any change made after this industries Plc.
period has not been covered in this study.
Annual Report (2010), Lanka Ceramic Plc.
49
Journal of Management, Volume VIII No. 1

Annual Report (2010), Royal Ceramic Lanka listed manufacturing Companies in Sri Lanka,
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Walker, R.W.,(1974).Essential of financial
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Measurement of operational performance
Through ratio analysis: A Case study of selected

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