Calculation of profitability ratios

Profitability ratios are the financial ratios which talk about the profitability of a business with respect to its sales or investments. Since the ratios measure the efficiency of operations of a business with the help of profits, they are called profitability ratios. They are quite useful tools to understand the efficiencies / inefficiencies of a business and thereby assist management and owners to take corrective actions.

Profitability ratios are the tools for financial analysis which communicate about the final goal of a business. For all the profit oriented businesses, the final goal is none other than the profits. Profits are the life blood of any business without which a business cannot remain a going concern.

Since, the profitability ratios deal with the profits, they are as important as the profits.

The purpose behind calculating the profitability ratios is to measure the operating efficiency of a business and returns which the business generates. The different stakeholders of a business are interested in the profitability ratios for different purposes. The stakeholders of a business include owners, management, creditors, lenders etc.

Uses of Profitability Ratios: the profitability ratios are useful to get insight of a business. It helps an analyst to get indication on the sufficiency or adequacy of profits. It finds out the rate of return and makes the business comparable to the industry as well as its own past. These ratios are used by banks and financial institutions while lending to the business as the ratios ensures them about the regular payments of interest and installments. Not only the bankers but owners also look at these ratios to know about the fruits, their investment is going to reap. Management follows and analyses these ratios to spot out the lacuna in their operations and thereby bring about the necessary improvements.

Profitability ratios based on sales for 2012 year

K1= Operating income/Gross sales= 16,422,187/66,357,937= 0.25

K2= Earnings before Income Tax/Gross sales = 20,243,948/66,357,937= 0.31

K3= Net income/Gross sales = 17,250,636/66,357,937= 0.26

Profitability ratios based on capital profitability

K4= Net income/Total assets = 17,250,636/459,169,778= 0.036

K5= Net income/Invested Capital = 17,250,636/35,275,554= 0.49

K6= Net income/Authorized capital = 17,250,636/34,617,204= 0.50

K7= Net income/Equity = 17,250,636/388,748,722= 0,044

Profitability ratios based on net cash flow

K8= Net cash flow/Gross sales= 43,833,108/66,357,937= 0.66

K9= Net cash flow/Total assets = 43,833,108/459,169,778= 0.096

K10= Net cash flow/Equity = 43,833,108/388,748,722= 1.27

Profitability ratios based on sales for 2011 year

K1= Operating income/Gross sales = 26,600,628/71,502,222 = 0.37

K2= Earnings before Income Tax/Gross sales = 27,892,973/71,502,222 = 0.39

K3= Net income/Gross sales = 23,162,075/71,502,222 = 0.32

Profitability ratios based on capital profitability

K4= Net income/Total assets = 23,162,075/450,028,927 = 0.052

K5= Net income/Invested Capital = 23,162,075/32,418,904 = 0.72

K6= Net income/Authorized capital = 23,162,075/34,617,204 = 0.67

K7= Net income/Equity = 23,162,075/371,498,086 = 0,062

Profitability ratios based on net cash flow

K8= Net cash flow/Gross sales= 21,852,387/71,502,222 = 0.31

K9= Net cash flow/Total assets = 21,852,387/450,028,927 = 0.049

K10= Net cash flow/Equity = 21,852,387/371,498,086 = 0.059

According to the profitability ratio analysis, we can notice there is an increase in profitability ratios based on net cash flow (K8 – 0,34 and K9 – 0,047). However, other items had decline in indices, but we have to remember that financial statement of KazTransOil JSC as of 2012 is semi-annual (as of 31 July, 2012), so I suppose that by new financial statement as of 31 December 2012, we will observe more positive results.

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