Almost all profit indicators show considerable improvements in terms of achieving higher profitability levels. Gross profit margin which is calculated by dividing the gross profit of the firm with total sales indicates how much the company has been able to earn before deducting its indirect expenses from the cost of sales. This ratio has improved by 3% from 2008 to 2009 indicating the firm has been able to reduce its cost of sales with respect to total sales. Operating margin is the most critical measure of assessing the profitability of the firm’ s operations and measuring how profitable a firm’ s operations are.
This is critical because the net profit margin may provide misleading figures because of the inclusion of extraordinary or one-off items in income statement which can inflate the figures. The operating profit margin for the firm has improved 5% during the two years indicating the firm’ s operations were able to generate more profit for the firm during the period. A higher operating profit margin, therefore, may be of quite an interest to the investors in building their overall future expectations about the firm and its ability to remain profitable in the foreseeable future. A net profit margin of the firm has increased also by more than 15% however; this is mostly due to the tax credit which firm obtained during the year 2009. This increase in profitability may, therefore, be not considered as an improvement in the overall profitability of the firm.
Conservative approach, therefore, suggests that the firm should be able to achieve its profitability through its core activities and other sources of profits such as other income, tax rebates etc shall not be considered as the permanent sources of profitability for the firm. However, based on the operating margins of the firm, it can be concluded that the firm has been able to improve its profitability during 2009. Similarly, return on assets as well as the return on equity has increased too during the period indicating that the firm has been able to improve its ROE and ROA.
However, this improvement specially in ROE may be the direct result of the tax credit obtained by the firm during 2009.Debt ratios indicate the extent of debt undertaken by the firm to finance its assets i. e.
how much percentage of assets are financed by the debt. As the data suggests that the firm has a very low debt ratio indicating that most of the assets are financed through internally generated equity of the firm.
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