Example Profit Margins A company has the following income statement for two

Example profit margins a company has the following

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Example : Profit Margins A company has the following income statement for two consecutive years. Year 1 Year 2 $ $ Sales revenue 70,000 100,000 (-) cost of sales 42,000 55,000 Gross profit 28,000 45,000 (-) Expenses 21,000 35,000 Net Profit 7,000 10,000 Return on equity = PBIT Shareholders’ equity
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___________________________________________________________________________________________________________________ Page 11 of 21 IPK COLLEGE 1664, JALAN KULIM, 14202 BUKIT MERTAJAM, PENANG TEL : 012-5203212 / 0125113212 / 04-5512588 Subject: Financial Management (DFM1) Prepared by Susan Lim Email : [email protected] The net profit margin at 10%, i.e. same for the both years, the gross profit margin as follows: Year 1: 28,000/ 70,000 = 40% ; year 2 : 45,000/ 100,000 = 45% o Increase in profit margin must be very good because this indicates a wider gap between selling price and cost of sales. However, the net profit ratio still be the same in which the expenses has be rising. In year 1expenses were 30% of turnover, whereas in year 2 they were 35% of turnover. This indicates that administrative or selling and distribution expenses may required tighter control. o The analysis of profit between year 1 and year 2 as follows: Year 1 Year 2 % % Cost of sales as a % of sales Gross profit as a % of sales Expenses as a % of sales Net profit as a & of sales Debt and gearing ratios Debts ratio will concerned how much the company owes in relation to its size and whether it is getting into heavier debt or improving its situation. Gearing is the amount of debt finance a company uses relative to its equity finance When a company is heavily in debt, and seems to be getting even more heavily into debt, banks and other lenders are likely to refuse further borrowing and the company will in trouble. When a company is earning only modest profit before interest and tax, and has heavy burden debt, it will be very little profit left over for shareholders after the interest charges have been paid.
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___________________________________________________________________________________________________________________ Page 12 of 21 IPK COLLEGE 1664, JALAN KULIM, 14202 BUKIT MERTAJAM, PENANG TEL : 012-5203212 / 0125113212 / 04-5512588 Subject: Financial Management (DFM1) Prepared by Susan Lim Email : [email protected] Liquidity ratios : cash and working capital A company needs liquid assets so that it can meet its debts when they fall due. Profitability is very important aspect of the company performance, debts or gearing also the same. Shareholders’ investment ratios Assess the investors returns , dividend yield, EPS, P/E ratio and dividend cover . Return to shareholders are obtained in the form of dividends received and / or capital gains from increase in market value. The finance of the company will depends if the investors satisfy with the expected returns. The information relevant to market prices is available from published stock market information, and in particular from certain stock market ratios. Cum dividend / cum div means purchaser of the shares is entitled to receive the next dividend payment.
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  • Spring '17
  • JANE KDAL

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