4.3. Profitability Ratio

4.3.
Profitability Ratio
Profitability ratios designate a company's overall efficiency and performance. It measures the
company how to use of its assets and control of its expenses to generate an acceptable rate of
return. It also used to examine how well the company is operating or how well current
performance compares to past records of both Foods companies.
There are five important profitability ratios that we are going to analyze:
1. Gross Profit Margin

2. Net Profit Margin
3. Return on Capital Employed
4. Return on Equity
4.3.1. Gross Profit Margin ratio
Gross margin express of the company efficiency of raw material and labor during the working
process .If any company higher gross profit margin then the company more efficiency to controls
their raw material and labors. So it is most important for performance evaluation of Foods
Company. It can be assigned to single products or an entire company. It determines the gross
profit to divide by net sales.
The gross profit margin ratio formula as following as;
Gross profit margin ratio= Gross profit/sales*100
Year Harischandra Mills PLC Nestle PLC
2020 757,987,584 *100 20.56% 12,219,021 *100 32.27%

3,686,440,071 37,866,215
2019 750,062,080 *100 20.40% 11,941,069 *100 32.85%

3,676,070,725 36,355,084
2018 678,308,200 *100 21.34% 13,850.401 *100 37.10%

3,178,556,180 37,336,943
2017 595,447,688 *100 19.82% 13,075,987 *100 34.78%

3,003,823,937 37,601,472
Analysis
When comparing 2017 year to 2020 year in Harischandra Company’s Revane, Cost of sale and
gross profit has been increasd.But gross profit margin ratio shows a decrease.
When comparing 2017 year to 2020 year in Nestle Company’s Revane and Cost of sale has been
increased but due to increment of cost of sale gross profit has been descried. So gross profit
margin ratio has decrease.
Both Company gross profit margin has been decreased due to economic resons. Both company
should try to decrease their cost of goods sold.
4.3.2. Net Profit Margin

The net profit margin is determined of net profit after tax to net sales. It argues that how much of
sales are changeover after al expense .The higher net profit margins are the better for any Foods
company.
Net Profit margin = Net profit after tax/sales*100
2020 152,582,747 *100 4.14% 2946883*100 7.78%

3,686,440,071 37866215
2019 249,930,337*100 6.80% 2565983*100 7.06%

3,676,070,725 36355084
2018 190,049,517 *100 5.98% 3,485,801 *100 9.34%

3,178,556,180 37,336,943
2017 186,619,472 *100 6.21% 3,635,841 *100 9.67%

3,003,823,937 37,601,472
Analysis:
In this analysis we see that the net profit margin has decreased in 2017 compare with next three
years both company .because the net profit and sales are decrease. May be Decrease in the
Revenue and increase in the expenses May results for this most probably the main reason for that
is decreasing the net profit.
4.3.3. Return on Capital Employed

This ratio reveals the efficiency of utilizing resources at management disposal. If this ratio is
higher than the previous period, it indicates that funds are utilized in more effective way than in
the previous year. The lower of the ratio may indicate one of following or combination of them.
 An over investment in assets in relation to sales volume
 An inadequacy of sales volume in relation to the cost of obtaining the sales revenue
 Inefficiency on the part of the management in production, purchasing, selling and general
operation.
 Depressed business condition
ROCE= PBIT /(Capital employed+NCL)*100
2020 246147285+1447979 *100 17.63% 4,263,921+2,721,55*100 56.20%

(1403465471+440479+155027) (5,933,783+84,460+2,053,7
56)
2019 309,768,440+7,234,115*100 23.51% 3,769,894+355,940*100 48.65%

1,348,544,929 (5,509,609+1,984,029+987,
577)
2018 260,176,079+20,501,428*100 22.21% 4,941,457+251530*100 56.65%

( 1,182,473,311+77,000,000+4,257,289) (5635156+2007954+152417
4)
2017 227,309,226+27,976,144*100 20.77% 4734672+183360 *100 66.41%

(1,076,714,576+77,000,000+7,539,5542 (4,801,035+11,894+2,592,2
) 00)
Analysis:
From 2018 years data we see Profit has continuously increased to 2017 in Harischandra Mills
Company. For this reason ROCE ratio has increase in little bit. But due to some problem in
Nestle Company here ROCE decreased slightly in 2018 than 2017. And this decline creates a
problem on ROCE in Nestle Company. As a result that company is not good condition during the
year 2018.so we think return on capital employed is best position for Harischandra Mills
Company.
4.3.4. Return on Equity

Return on Equity is compute by dividing net income less preferred dividend by average company
stockholder equity. It demonstrate how a company to generate earnings growth for using
investment fund. It has some alternative name such Return on average common equity, return on
net worth, Return on ordinary shareholders' fund.
Return on common stock equity = PAT- Preference share Dividend / Common stockholder’s
equity*100
152582747-0 *100 10.87% 2,946,883-0 *100 50%

2020 1403465471 5,933,783
249930377-0 *100 18.53% 2,565,983-0 *100 47%

2019 1348544929 5,509,609
16.07%
190049517-0 *100 3,485,801-0 *100 62%
2018
1182473311 5,635,156
186619472-0 *100 17.33% 3,635,841 – 0 *100 76%

2017 1076714576 4,801,035
Analysis:
ROE indicates efficiency of utilizing shareholders’ fund for generating revenue for the same
problem of the return on equity has decreased in the from 2017 to next three years in both
company. It means the company is losing efficiency in production process and also this falls in
return on equity has a bad affect in common stock holder.

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4.3.

1. Gross Profit Margin

Year Harischandra Mills PLC Nestle PLC

2020 757,987,584 *100 20.56% 12,219,021 *100 32.27%

2019 750,062,080 *100 20.40% 11,941,069 *100 32.85%

2018 678,308,200 *100 21.34% 13,850.401 *100 37.10%

2017 595,447,688 *100 19.82% 13,075,987 *100 34.78%

4.3.2. Net Profit Margin

Year Harischandra Mills PLC Nestle PLC

2020 152,582,747 *100 4.14% 2946883*100 7.78%

2019 249,930,337*100 6.80% 2565983*100 7.06%

2018 190,049,517 *100 5.98% 3,485,801 *100 9.34%

2017 186,619,472 *100 6.21% 3,635,841 *100 9.67%

4.3.3. Return on Capital Employed

ROCE= PBIT /(Capital employed+NCL)*100

Year Harischandra Mills PLC Nestle PLC

2020 246147285+1447979 *100 17.63% 4,263,921+2,721,55*100 56.20%

2019 309,768,440+7,234,115*100 23.51% 3,769,894+355,940*100 48.65%

2018 260,176,079+20,501,428*100 22.21% 4,941,457+251530*100 56.65%

2017 227,309,226+27,976,144*100 20.77% 4734672+183360 *100 66.41%

4.3.4. Return on Equity

Year Harischandra Mills PLC Nestle PLC

152582747-0 *100 10.87% 2,946,883-0 *100 50%

249930377-0 *100 18.53% 2,565,983-0 *100 47%

186619472-0 *100 17.33% 3,635,841 – 0 *100 76%

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2020 757,987,584 100 20.56% 12,219,021 100 32.27%

2019 750,062,080 100 20.40% 11,941,069 100 32.85%

2018 678,308,200 100 21.34% 13,850.401 100 37.10%

2017 595,447,688 100 19.82% 13,075,987 100 34.78%

2020 152,582,747 100 4.14% 2946883100 7.78%

2019 249,930,337100 6.80% 2565983100 7.06%

2018 190,049,517 100 5.98% 3,485,801 100 9.34%

2017 186,619,472 100 6.21% 3,635,841 100 9.67%

2020 246147285+1447979 100 17.63% 4,263,921+2,721,55100 56.20%

2019 309,768,440+7,234,115100 23.51% 3,769,894+355,940100 48.65%

2018 260,176,079+20,501,428100 22.21% 4,941,457+251530100 56.65%

2017 227,309,226+27,976,144100 20.77% 4734672+183360 100 66.41%

152582747-0 100 10.87% 2,946,883-0 100 50%

249930377-0 100 18.53% 2,565,983-0 100 47%

186619472-0 100 17.33% 3,635,841 – 0 100 76%