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Profitability Ratios

This document discusses three profitability ratios - return on assets, return on equity, and return on capital employed - for a company called Cadila Health Care Ltd over several years. Return on assets remained mostly stable between 0.05-0.11x, indicating efficient use of assets. Return on equity fluctuated but increased in the last three years, showing improved profitability for shareholders. Return on capital employed was highest in 1998-99 at 18.49% but fell in subsequent years, suggesting room for better capital usage.

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81 views3 pages

Profitability Ratios

This document discusses three profitability ratios - return on assets, return on equity, and return on capital employed - for a company called Cadila Health Care Ltd over several years. Return on assets remained mostly stable between 0.05-0.11x, indicating efficient use of assets. Return on equity fluctuated but increased in the last three years, showing improved profitability for shareholders. Return on capital employed was highest in 1998-99 at 18.49% but fell in subsequent years, suggesting room for better capital usage.

Uploaded by

satyamehta
Copyright
© Attribution Non-Commercial (BY-NC)
We take content rights seriously. If you suspect this is your content, claim it here.
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Download as DOC, PDF, TXT or read online on Scribd
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PROFITABILITY RATIOS

1) Return on assets=PAT/Total Assets PROSIT AFTER TAX Total Assets Ratio 1998-991999-2000 2000-01 2001-02 2002-03 313 399 656 671 766 2855 8357 6922 9674 11709 0.11 0.05 0.09 0.07 0.07

INDICATION: It tells us: 1. The sales are adequate or whether they are otherwise generates for the volume of assets. 2. The asset investment is too large for the sales volume. 3. The company is carrying a large investment in fixed assets, in circulating assets, or in both.

Return On Assets
0.12 0.10 TIMES 0.08 0.06 0.04 0.02 0.00 1998-99 1999-2000 2000-01 2001-02 YEARS 2002-03 0.05 0.11 0.09 0.07 0.07

Return On Assets

INTERPRETATION: Return on assets ratio is not varying much. It is almost stable. This is a good sign for the company. This ratio is combination of two-ratio1.net profit ratio 2. Total assets turnover ratio. It is highest in year 1998-99 indicates that company has used its assets efficiently in that year.

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2) Return On Equity=(PAT-Pref Dividend)/Net Worth 1998-99 1999-2000 2000-01 2001-02 2002-03 Profit After Tax 313 399 656 671 766 Pref Dividend 2 2 2 1 0 Net Worth 848 4926 5434 5514 4390 Ratio (%) 36.67 8.06 12.04 12.15 17.45

INDICATION: Return on equity ratio shows what percentage of profit is earned on the capital invested by ordinary shareholder. The profitability of the firm from the owners point of view should, therefore, in the fitness of things be assessed in terms of the return to the ordinary shareholder. The ratio is obtained by dividing net profit after deduction of preference dividend by net worth.

40.00 35.00 30.00 25.00 20.00 15.00 10.00 5.00 0.00

36.67

Return On Equity

TIMES

17.45 12.04 8.06 12.15

1998-99

1999-2000

2000-01 YEARS

2001-02

2002-03

Return On Equity

INTERPRETATION: This ratio of the Cadila Health Care Ltd shows irregular trend. It is decreased from year 1998-99 to 1999-2000 then it is increased for last three year. Increase in this ratio for last three year is good sign for investors and for the company. It shows companys efficiency to earn more profit without any major equity issues.

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3) Return On Capital Employed=PBIT/Capital Employed 1998-99 1999-2000 2000-01 2001-02 PBIT 416 605 738 813 Capital Employed 2250 7224 5956 8571 Ratio (%) 18.49 8.37 12.39 9.49

2002-03 1441 9676 14.89

INDICATION: Return on capital employed is an index of profitability of business and is obtained by comparing profit before interest and tax with capital employed. The term capital employed term includes share capital, reserves and surplus and long-term loans such as debentures.

Return On capital Employed


20.00 PERCENTAGE 15.00 10.00 5.00 0.00 1998-99 1999-2000 2000-01 YEARS 2001-02 2002-03 8.37 18.49 14.89 12.39 9.49

Return On capital Employed

INTERPRETATION: Return on capital employed of the Cadila was highest in the year 1998-99 and it was 18.49, which indicate that the company has used its capital employed more efficiently. In year 2002-03 ratio is somewhat near to the highest ratio though company has to take action to increase this ratio.

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