DALUBHASAAN NG LUNGSOD NG SAN PABLO
Lungsod ng San Pablo
Bachelor of Science in Accountancy & Entrepreneurship
AE 20 Module 2
Lesson 6 Title: Profitability Analysis
Learning Objectives:
To study the composition of Annual Reports
To know and understand interim reporting
References:
1. BUSINESS: An Integrated Framework by Dr. Fry, Dr. Stoner, Dr. Hatwick
2,Company Annual Reports
3. Business Finance by Roberto G. Medina, PhD
Lectures/Explanations/Discussion:
Various financial analysis can be produce from financial information in the form of ratios,
computation of it and interpretation. The following are normally the output of that analysis;
Gross Profit Margin
Computed by dividing gross profit over revenues, gross profit shows the relationship
between profit and sales. .A rising margin means rising profitability and growth. Conversely, a
failing margin means falling profitability.
Current Ratio
Used to measure the firm’s financial liquidity. Its ability to meet short term obligations. This is
the ratio between assets and current liabilities. For banks, which maintain a different set of
accounts that does not classify asset or liabilities, the liquidity ratio was utilized instead by
dividing liquid assets to total deposits.
Debt-Equity Ratio
This ratio is computed by dividing total liabilities by stockholders’ equity. It measures the
solvency of a firm and indicates long term stability.
Net Cash (Net Debt)
Net Cash shows the cash position of a company in a given period. This is the sum of
depreciation and amortization, deferred income taxes, operating gains/losses other non-cash
items, accounts receivables, inventories, other current assets, short term debt and other current
liabilities.
Return on Sales
This ratio is computed by dividing net income by net sales. It measures the extent to which
the firm has been able to generate profits.
Return of Equity
This ratio is calculated by dividing net income stockholders’ equity. It shows how much the
company is earning from invested by its stockholders.
Dupont System
A method of examining changes in the return on equity (ROE) by dividing it into component
parts. Its purpose is to determine financial area of low performance or concern. The ROE ratio
can be broken down into three (3) ratios – net profit margin, total assets turnover and financial
leverage multiplier:
( Profit Margin ) (Total Asset Turnover ) ( Financial Leverage )
ROE = Net Income/Net Sales X Net Sales/Total Assets X Total Assets/Common Equity
Earnings per Share
A company’s earnings (profit) divided by the number of shares of stock outstanding. The
measure allows analyst to compare one publicly held firm with another. The Philippine Stock
Exchange report usually released reports on companies by industries with the value of their
stocks or shares and changes on its earnings or income.
Some analyst, enhance their comparison by expressing each item a a percentage of that item in
the financial statement of another year (base amount) in order to more easily see year to year
changes. This is called horizontal analysis. Similarly, vertical analysis involves expressing
each item in the financial statements as a percentage of appropriate corresponding total, or
base amount but with the same year. Example, cash, inventory and other assets can be
restated as a percent of total assets, net income, and each expense can be restated as a
percent of revenue.
Regardless of the specific technique used, the essential point is that numbers are virtually
isolation. Their values derive from comparison with other numbers. The most common way of
comparing accounting numbers to evaluate performance and risk of a firm is ratio analysis
Activity Ratios
It measures company’s efficiency in managing is assets
RAMON R. ENRIQUEZ, CPA, CIA ,MBA
Course Instructor
