In relation to In relation to

SALES INVESTMENT

1. Gross Profit Ratio 1. Return on Investment

2. Operating Expense ratio 2. Return on capital employed
3. Operating profit ratio 3. Return on shareholders fund
4. Net Profit ratio 4. Return on Total Assets
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Gross Profit
Ratio á
á áá
 á
 á
 á


Operating
Expense ratio 64.6 62.46 58.24 60.6 61.13

Operating Profit
ratio á
 á
 
 á
 á


Net Profit Ratio 
 
 á
á á
á 


 Gross profit ratio (%)
Mar 06 Mar 07 Mar 08 Mar 09 Mar 10

This ratio tells us about the relationship between gross profit and net sales.




  Higher the ratio, more profitable will be the concern. As gross profit is
a difference between cost of production and sales, so higher ratio means more control
of concern on its cost of production, which is good.

Gross profit ratio can be improved:

1. By increasing gross profit on sales ,or
2. By reducing net sales at same profit.
3. By reducing direct expenditure
 Gross profit ratio
From 2006 to 2007, Gross profit ratio increases
from 38.81 % to 39.84 % but after 2007 it is
continuously declining i.e. 39.84% (2007) to
31.36% (2010).
It is not a good sign of profitability means company
is losing its control over cost of production.
Company͛s COP is increasing every year but sales
are not increasing at same rate as that of COP.
Operating Cost ratio (%):
Mar 06 Mar 07 Mar 08 Mar 09 Mar 10

T is ratio tells s a o t t e relations ip et een Operating cost an net sales




  Lo er t e ratio, profita le ill e t e concern.

B t in t is case, Operating cost is ig i.e. Profita ility of t e company is not p to
t e mark.

Operating Cost = Cost of goo sol + office exp. + a ministration exp.

+ selling an istri tion expenses
 Operating Cost ratio

Initially Operating cost ratio was declining (2006

to 2008), but after 2008 it again started
increasing which shows poor profitability of
the concern.
Operating Profit ratio:
Mar 06 Mar 07 Mar 08 Mar 09 Mar 10

This ratio tells us about relationship between Operating profit and net sales.




  Higher the ratio, more profitable will be the concern.

In this case, ratio initially was increasing, then started declining which shows poor
profitability of concern.

Operating Profit = Sales ʹ Operating cost (i.e. Cost of good sold + office exp. +
administration exp. + selling and distribution expenses)
Net Profit ratio (%):
ar 6 ar 7 ar 8 ar ar

This ratio shows the relationship between net profit and net sales.




  Higher the ratio, more profitable will be the concern. Net profit
should be enough to pay dividends and make necessary appropriations.

Net profit ratio can be improved by:

è Increasing gross profit
è Increasing sales
è Reducing Indirect expenses (Office exp.+ administrative exp. + selling exp.)
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Return on capital
employed ›
 ›
 
 
 


Return on equity
shareholders fund ›
 
 
 
 


Return on total
assets 
 ›
› ›
 
 ›

Return on capital Employed (%):
ar ar 7 ar 8 ar 9 ar 1

This ratio tells us about relationship between adjusted profit and capital
employed.

?

 
= Fixed Assets + Current Assets ʹ Current liabilities

 
 
= Profit for the year + Non-operating expenses ʹ Non
operating Incomes.

  
 
    
  
   
Return on Equity shareholder funds(%):
Mar 06 Mar 07 Mar 08 Mar 09 Mar 10

This ratio tells us about the relationship between Net profit (after interest,
taxes and preference share dividend) and equity share capital (Paid up).

 
       

   


   


   
  


 

     

    

 

  


  

  






 
  
  
  

 
  

  


 
 
   
    
 
 
   
Return on total assets (%):
Mar 06 Mar 07 Mar 08 Mar 09 Mar 10

31.77 23.45 13.57 10.16 8.38

This ratio tells us about the relationship between Net profit (after tax) and Total
Assets.

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Dorking capital turnover ratio 51.07 -226.06 1.73 7.21 -19.91

Fixed Asset ratio






rebtors turnover ratio 
 
 áá
 
 


rebtors collection period 7.84 8.84 10.91 12.24 13.52

Creditors turnover ratio 6.51 6.77 5.67 5.63 6.64

Creditors payment ratio 56.07 53.91 64.37 64.83 54.97

Stock turnover ratio
 
á
 
 


Dorking Capital Turnover Ratio

Following formula is used to calculate working capital

turnover ratio:
·   $
 !   %
 & $ 
   ' ?

  $
(
?
   
 is found by deduction from the total of
the current assets the total of the current liabilities.



 

The working capital turnover ratio measure the

efficiency with which the working capital is being
used by a firm. A high ratio indicates efficient
utilization of working capital and a low ratio indicates
otherwise. But a very high working capital turnover
ratio may also mean lack of sufficient working capital
which is not a good situation.
 Fixed Assets Ratio

Fixed ratio is also known as sales to fixed assets ratio. This

ratio measures the efficiency and profit earning capacity of
the concern.
Fixed assets ratio ratio is calculated by the following formula:
G 
%
 &$ 
  '?
G 




 

Higher the ratio, greater is the intensive

utilization of fixed assets. Lower ratio means
under-utilization of fixed assets.
 rebtors turnover ratio

r 

  
   
   
  
  indicates

the velocity of debt collection of a firm. In simple words it indicates the
number of times average debtors (receivable) are turned over during a
year.
·r 
!  %
 &?
$ 
 '  ! r 
(



 
The higher the value of debtors turnover the
more efficient is the management of debtors
or more liquid the debtors are. Similarly, low
debtors turnover ratio implies inefficient
management of debtors or less liquid debtors.
It is the reliable measure of the time of cash
flow from credit sales
 rebtors collection period

rebtor Collection Period is the year's sales which were outstanding

at the balance sheet date, expressed in days. A rough measure of
the days of credit that a firm's offers to its suppliers/clients.
The formula is as follows:
·
! r 
) ?    r
*'?
$ 
 (



 
This ratio measures the quality of debtors. A
short collection period implies prompt payment
by debtors. It reduces the chances of bad debts.
Similarly, a longer collection period implies too
liberal and inefficient credit collection
performance. It is difficult to provide a standard
collection period of debtors.
 Creditors Turnover ratio

This ratio is similar to the debtors turnover ratio. It compares

creditors with the total credit purchases.
It signifies the credit period enjoyed by the firm in paying
creditors. Accounts payable include both sundry creditors and
bills payable.



 
A high creditors turnover ratio or a lower credit
period ratio signifies that the creditors are being
paid promptly. This situation enhances the credit
worthiness of the company. However a very
favorable ratio to this effect also shows that the
business is not taking the full advantage of credit
facilities allowed by the creditors.
 Creditors payment ratio

This ratio tells us about the number of days or month

or week, a concern has to wait before its creditors are
paid off.

$ 
 +  

' 
 
   &

 
  
'?
 


 *, ?   
  




 

Lower the number of days, more efficient is the

management regarding creditors turnover. Too much
lower number of days means concern is enjoying
benefit of discount policy and ignoring the benefits of
credit policy whereas too much higher number of days
means concern is enjoying the benefits of credit policy
but ignoring the benefits of credit policy.
 Stock Turnover ratio

· 

!  %
 &$ 
   '
   


 
(



 
Inventory turnover ratio measures the velocity of
conversion of stock into sales. Usually a high inventory
turnover indicates efficient management of inventory
because more frequently the stocks are sold, the
lesser amount of money is required to finance the
inventory. A low inventory turnover ratio indicates an
inefficient management of inventory. A low inventory
turnover implies over-investment in inventories, dull
business, poor quality of goods. The inventory
turnover ratio is also an index of profitability, where a
high ratio signifies more profit, a low ratio signifies
low profit.
 Conclusion
From above ratios, we can conclude that:
è Concern͛s profitability is not good.
è Concern is at risk
è Shareholder͛s risk is more than outsider͛s risk.
è Efficient use of Dorking Capital
è Under utilization of fixed assets
è Enjoying credit policy from suppliers for 2
months (app.)