PROFITABILITY RATIOS
1. GROSS PROFIT
(Sales – Cost of Goods Sold) / Sales (%)
It is calculated by dividing gross operating profit by the sales for the year.
This ratio is important for industrial and commercial businesses, because it provides a measure for assessing their profitability. A business is considered successful when it has a high gross profit percentage, allowing it to cover its operating and other expenses and at the same time leaving it a satisfactory net profit in relation to sales and to the equity it employs. A high ratio shows the ability of management to buy cheaply and sell at high prices, while a low ratio shows the opposite.
2. COST OF GOODS SOLD
Cost of Goods Sold / Sales (%)
It is calculated by dividing the cost of goods sold by sales
This ratio shows the relationship between the cost of the products or merchandise sold and sales, and measures how effectively the cost of goods sold is controlled.
3. OPERATING PROFIT TO SALES
Operating profit / Sales ( % )
It is calculated by dividing profit before financial expenses and tax by sales.
This ratio measures the profitability of sales from the normal activity of the business, that is, how profitable its purchasing, production and distribution activities are.
4. EFFECTIVENESS OF FINANCIAL LEVERAGE
% change in net profit / % change in results before interest and tax
It is calculated by dividing the percentage change in total results (operating profit) by the percentage change in partial results (profit before interest and tax)
It is used to assess how effectively management uses financial leverage and to forecast changes in the net profit of the business in relation to changes in total operating results.
5. EFFECTIVENESS OF OPERATING LEVERAGE
% change in results before interest and tax / % change in sales
It is calculated by dividing the percentage change in partial operating results before interest and tax by the percentage change in sales.
It is used to assess operating leverage, which refers to the degree to which fixed-cost items (e.g. fixed assets) are used in relation to variable-cost items (e.g. labour) in a business, in order to forecast future fluctuations in profits in relation to possible fluctuations in sales volume.
6. ASSET UTILISATION or SALES VOLUME
Sales / Average Total Assets
It is calculated by dividing the sales of a year by the total assets of the business used during the same year to achieve its sales.
This ratio assesses how intensively the business uses its assets to achieve its sales targets. A high asset utilisation ratio means that the business uses its assets intensively to make its sales. A low ratio indicates that its assets are not used intensively. In essence this ratio shows whether there is over-investment of capital in the business relative to the level of its sales.
7. FIXED ASSET UTILISATION
Sales / Average net Fixed Assets for the year
It is the quotient of the sales for the year divided by the average total fixed assets used by the business in the year.
It shows the degree to which the business uses its fixed assets in relation to its sales. It also indicates whether there is over-investment in fixed assets. The higher this ratio, the more intensive the use of the fixed assets of the business in relation to its sales. A fall in this ratio over time may mean that there is over-investment of capital in fixed assets relative to the sales capacity of the business.
8. WORKING CAPITAL UTILISATION
Net Sales / Net Working Capital
It is calculated by dividing the sales for the year by net working capital. Net Working Capital = Current assets – Short-term liabilities
This ratio shows how many € of net sales the business makes for each € of net working capital not financed by short-term creditors. A high ratio may reflect a shortage of net working capital and a low inventory turnover or receivables collection rate. A low value of the ratio may be the result of a surplus of net working capital placed in temporary investments.
9. EQUITY UTILISATION
Net Sales / Average Equity excluding grants
It is calculated by dividing sales by the average total equity for the year, excluding grants.
It shows the turnover of the equity of the business on the basis of sales. The higher this ratio, the better the position of the business, because it makes large sales with a low level of equity, and profits may be higher. With a low value of the ratio, losses will be proportionately greater because of the increased financial expenses created by external funds.
10. NET PROFIT
Profit after tax / Sales (%)
It is calculated by dividing net profit after tax by the sales for the year.
It shows the percentage of net profit a business achieves on its sales. The higher the ratio, the more profitable the business.
11. RETURN ON TOTAL CAPITAL
(Net profit + Financial expenses) / Total Capital (equity + liabilities) %
It is calculated by dividing net profit before financial expenses and tax by the total capital employed in the year.
This ratio shows the profitability of the business regardless of the sources of its funds.
12. RETURN ON ASSETS
Profit after tax / Total Assets (%)
It is calculated by dividing net profit after tax by total assets
This ratio measures the return on the total assets of a business.
13. RETURN ON INVESTMENT (Du Pont EQUATION)
100*(Sales / Total Assets)*(Profit before interest and tax / Sales)
It is calculated by multiplying the quotient of sales divided by total assets by the quotient of net profit before interest and tax divided by sales.
This composite ratio is important because it shows the significance of asset turnover and of the net profit of a business, and helps discover possible ways in which its operating profits can be increased in relation to the assets employed in the business. An increase in return on assets can be achieved either by: (a) An increase in net profit from the sales of its products, either by reducing the cost of goods sold or by raising the selling price. (b) An increase in asset turnover, either by increasing sales volume or by reducing the assets employed in the business.
14. OPERATING RETURN
Profit before interest and tax / Total Assets (%)
It is calculated by dividing net profit before financial expenses and tax by total assets.
It shows the ratio of operating results to total assets. It measures the profitability of the assets of the business.
15. LOSS PROVISION RATIO
Provision for losses / Total receivables %
It is calculated by dividing total provisions for losses by total receivables.
Monitoring the trend of this ratio is useful for assessing the liquidity of receivables. An increase in the ratio indicates difficulty in collecting receivables.
16. SALES MARGIN RATIO
Profit before financial expenses and tax / Sales ( % )
It is calculated by dividing profit before financial expenses and tax by the sales for the year.
It shows the effectiveness of sales and, by extension, of the business
17. SALES TO AVERAGE RECEIVABLES
Sales / Average Receivables %
It is calculated by dividing the sales for the year by average total receivables.
A high ratio means funds are tied up for a short time and a better position in terms of credit granted to the business.
18. CHANGE IN SALES %
(Sales of the current – of the previous year) / sales of the previous year %
It shows the change in sales of the current year from the previous one.
The Company Specisoft S.A.
Specisoft S.A. was founded in 1987 as a specialised software development company, its main characteristic being the development of software on subjects involving knowledge, high specialisation, special optimisation algorithms and very large-scale data processing.
The subjects of the programs (among others) concern a) Business software (Business Planning – Business Plan, Financial Analyses of Balance Sheets, Business Valuation, Standard Costing, Forecasts, Investment Appraisals etc.), b) Financial software (Fundamental Analysis, Portfolio Selection etc.), c) Business Games (Business Simulators), d) Optimisation of Economic Problems, e) Educational software on the above subjects.
The programs run on WINDOWS locally, on a network and over the INTERNET.
Almost all the company’s employees are university graduates. In addition, the company employs specialised, highly experienced external associates holding postgraduate degrees (Master’s and PhD) and has university professors as advisers.
The company’s customers are Businesses, Business Consultants, Accounting firms, Public Organisations, Municipalities etc. Among its customers (the company has more than one thousand seven hundred) are many of the largest Greek companies, more than eighty-five of them listed on the Athens Stock Exchange.
A very important part of the company’s customer base is the Greek higher-education Institutions (universities and technological institutes), Vocational education (Public and Private vocational institutes), Colleges, Seminar Organisations, Vocational Training Centres etc., which equip their laboratories with the company’s programs, used directly in the training of their students.
Specisoft, with its software technology, its specialised optimisation algorithms and the knowledge of specialist financial subjects that it embodies in the software it produces, can be described as a knowledge company within the emerging knowledge economy.
Specisoft S.A.
17 Pergialitou St., 15451 Neo Psychiko
Tel: +30 210-6911468, Fax: +30 210-6993791
e-mail: info@specisoft.gr, SITE: www.specisoft.gr