A STUDY ON PROFITABILITY ANALYSIS OF JYOTHY LAS

1.1 INTRODUCTION

MEANING AND DEFINITION OF PROFITABILITY:

PROFITABILITY is a primary measure of the overall success of the company. Its necessary for
the company’s survival. It is a measure of the income or the operating success of the company
for a given period of the time. A company’s income or lack of its ability to obtain debt and
equity financing its liquidity positions and its ability to grow cannot e determined.

Profitability is frequently used as the ultimate test of investments operating efficiency. Profit
earning is essential for the survival and growth of the business. A business needs profits not
only for its existence but also for expansion and diversification .A business finds it difficult to
remain stale and survive in gather market without profits. The greater the volume of profits
generated, the higher is the efficiency of the concern.

Every investors need higher rate of return on their investments despite of investors, even the
workers are expecting higher wages and creditors wants to secure their loans and interest.
Today in the business environment , profit is backbone of every industry for guiding the
business operations .

Profitability means a company’s ability to earn return on investment through its business
activities. It shows how the resources are efficiently utilized to achieve its goal of earning
profits. Profits are essential for the organization to make dividend payments to its shareholders
as well as retain a part of profits as reserves to overcome the unforeseen circumstances in the
near future.

WESTON and BRIGHAM define Profitability as” the net surplus of a large number of policies
and decisions”

Profit and profitability are two terms used in accounting that have similar underlying principles.
Earning a higher profit and being profitable is the main objective of companies established with
a profit focus . the key difference between profit and profitability is that while PROFIT IS THE
NET INCOME MADE AFTER COVERING EXPENSES, PROFITAILITY IS THE EXTENT TO WHICH
PROFIT IS MADE. Profit is an absolute amount and it cannot e successfully compared since it is
not relative. Profitability is expressed as a percentage and it can be successfully compared
through the use of ratios.
The main difference between profit and profitability is that profit is the net income made after
covering expenses whereas profitability is the extent to which profit is made. It is not sufficient
to calculate the profit for the period alone since this does not allow comparisons with profits
made in past years and with other similar companies. It is important to maintain an upward
trend in profit where the company grows profits year on year. This amounts to increasing
profitability.

Profit is regarded as an absolute notation as against profitability .Which is regarded as a relative

concept where profit is the residual income left after meeting all administrative expenses.
Profitability is the profit making ability of an enterprise. The profit figure indicates the amount
of earning of a business during special period while, profitability denotes whether these profits
are constant or improved or deteriorated, how and to what extent they can be improved profit
in two separate business concerns may be identical . Yet, at many times, it usually happens
that their profitability varies when measuring terms of size of investment. It has been aptly
remarked that the role played by profits and profitability in a business enterprise is identical to
the function carried out by blood and pulse in the human body. Profitability is the ability to
earn profit from all the activities of an enterprise . Indicates how well management of an
enterprise generates earnings by using resources at its disposal. In the other words the ability
to earn profit eg. Profitability. It is composed of two words profit and ability. The word profit
represents the absolute figure of profit but and absolute figure alone does not give an exact
idea of the adequacy otherwise of increase or change in performance as shown in the financial
statements of the enterprise. The word ”ability” reflects the power of an enterprise to earn
profits, its called earning performance. Earnings are an essential requirement to continue the
business. So we can say that a healthy enterprise is that which as good profitability.

According to HERMENSON EDWARD AND SALMONSON “ Profitability is the relationship of

income to some balance sheet measured which indicates the relative ability to earn income
on assets employed”.

Profitability [p] is the profit earning capacity which is a crucial factor contributing to the
survival of the firm. The perpetual existence of the firms depends on the profit earning capacity
of the firm. Which is also considered to be the main factor capacity of the firm, which is also
considered to be the main factor in influencing the reputation of the firm. The borrowing
capacity of the firm is also determined by profit.

Thus, it is considered as the main factor in determining the capital structure of the firm. The
profits consists of two words, profit and ability. Therefore, it is necessary to differentiate
between profit and profitability at this juncture. Profit, from the accounting point of view ,is
arrived at by deducting from the total revenue of an enterprise all amount expended in earning
that income whereas profitability can be measured in terms of profit shown as a percentage of
sales known as profit margin.

Profitability as been given considerable important in the finance and accounting literatures.
According to HIFZRAMALIK[2011], Profitability is one of the most important objectives of
financial management sine one goal of financial management is to maximize the owner wealth
and profitability is very important determinant of performance.

A business that is not profitable cannot survive , conversely , a business that is highly profitable
as the ability to reward its owners with the large return on their investment . Hence, The
ultimate goal of a business entity is to earn a profit in order to make sure the sustainability of
the business in prevailing market conditions. PANDEY[1980] defined the profitability as the
able a business, Whereas it interprets the term profit in relation to others elements. It is
necessary to examine the determinants of profitability to understand how company finances
and their operations.

Profitability analysis classifies measures and assesses the performance of the company in the
term of the profits it earned either in relation to the shareholder investment or capital
employed in the business or in relation to sales, profit,[or loss].Given the most enterprises
invest in the order to make a return , the profit it earned by a business can be used to measure
the success of the investment.

HERMANSON [1989]defines that profitability is the organization ‘ability to generate income is

a loss’. He further assets that if the income generated is greater that the input cost, that is
simply profitability but if the incomes or less that the input costs , it reflects poor performance.

BENEFITS OF PROFITAILITY ANALYSIS:

The one important objective of a business is to earn a satisfactory return on invest funds. Profit
began an absolute figure fails to indicate the adequacy of income or changes in efficiency
resulting from the financial and operational performance of the business. To analyze the overall
efficiency of the business. Profitability of the firm can be measured by its profitability ratios.

Profitability ratios can be divided in two type’s margins and returns, ratios that shows margins
represent firm’s ability to translate sales into profits at various stages of measurement. And
returns represent a firms overall ability and efficiency in generating returns of its shareholders.

The analysis of financial statements is to obtain a better understanding of the firm’s position
and performance. Financial analysis can be undertaken by management of the firm, or by parts
outside the firm. Financial statements provides small business owners with the basic tools for
determining how well their operations the perform at all times. These statements are concise
reports designed to summarize financial activities for specific periods.

Owners and Managers can use financial statement analysis to evaluate the current financial
condition of their business, diagnose any existing financial problems , and forecast future trends
in the firms financial position. The focus of the financial analysis is on key figures in the financial
statements and the significant relationships that exist between them. We have choosen
JYOTHY LABS limited in order to study the process of evaluating relationships between
component parts of financial statements current raise in ujala liquid price and also to analyze
the effectiveness of the company to the current situations.

Profit is a financial benefit that is realized when the amount of revenue gained from a business
activity exceeds the expense , costs and tax needed to sustain the activity. Any profit that is
gained goes to the business’s owners, who may or may not decide to spend it on the business.

Profit is the money a business makes after accounting for all expenses. Regardless of whether
the business is a couple of kids running a lemonade stand or a publicly traded multinational
company, consistently earning profit is every company’s goal .As a result , much of business is
performance is based on profitability in its various forms. Some analysts are interest in top-line
profitability, whereas others are interested in profitability before expenses, search as taxes and
interest ,and still others are only concerned with profitability after all expenses have been paid.

There are three major types of profit that analysts analyze:

 Gross profit
 Operating profit
 Net profit

Each type of profit gives the analyst more information about the company’s performance,
especially when compared against other time periods and industry competitors. All three levels
of profitability can be found on the income statement.

CONCEPT OF PROFITABILITY:

1.ACCOUNTING PROFITABILITY:

Profitability is a measure of evaluating the overall efficiency of the business the best possible
course for evaluation of business efficiency may be input-output analysis. Profitability can be
measured by relating output as a proportion of input or matching it with the results of other
firms of the same industry or reveals in the difference periods of operations . Profitability of a
firm cane be evaluated by comparing the amount of capital employed i.e., the input with
income carried eg.,the output. This is popularly known as return on investment or returns on
capital employed. It is recorded in the overall profitability rationed as two components :NET
PROFIT RATIO AND TURNOVER RATIO.

RETURN ON INVESTMENT = NET PROFIT RATIO x TURNOVER RATIO

(OR)

RETURN ON INVESTMENT= OPERATING PROFIT x SALES

This method is increasingly accepted as an indicator of performance and capability. This is the
reason for viewing operational and financial performance is relation to the scale resources of
funds required in production. That is , ‘a given amount of profit return should be evaluated in
terms of the percentage profit return on the investment of funds .

Moreover, ‘the return on capital used depicts the effectiveness of all the operating decision
from the routine to the critical, made by the management at all levels of the organisation shop
foreman to president.

2.SOCIAL PROFITABILITY:

Along with the economic objective of earning profits, a business is also required topper from a
large number of social objectives. Besides providing better quality of goods and services, it
provides big employment opportunities to the people , better condition of work , fulfil
community needs , conserves resources etc. C.MEAN CARDINER rightly observed , “the
darkness of avarice has been dispelled by the light of a new kind of social responsibility”. Social
objectives may prove profitable as well as expensive concern. As some objectives aids in
enhancing profitability by attracting customers like in case of providing quality goods. With
other may be counter active such as elemenation of pollution may cause the company can
reduce its profitability, but it creates social profitability. In other words of earnest dale , these
through social objectives “appear to urge the executive assume an infinitely broad –gauge
burden of responsibilities to all the various public with whom he clears. “That makes it an
obligations on the part of the company to disclose its financial, marketing, personnel and social
objectives in a simple and concise from to all the members of the concern So that they can
judge the influences of these objectives on their jobs.

3.VALUE ADDED PROFITABILITY:

Wealth generation is essential for every enterprise. Value added profitability indicates the
wealth generated [NET VALUE EARNED]as a result of manufacturing process during a specified
period. Wealth generation is very essential for survival or growth of a business. An enterprise
may survive without making profit but would cease to do so without adding value .”The
enterprise, not making profit, is bound to become sick but not add value may cause its death
over a period of line. “Profit forms a part of value added”. Thus , value added is a border
concept. “ Value added at particular level of operating capacity and claims should be
determined as value added can expose the efficiency and inefficiency of a business”. The
concept of value added can be related to the concept of social profitability of an enterprise. The
investment of an enterprise comprises of the investment of shareholders, debenture holders,
creditors, financial institutions etc. If an enterprise fails to generate growth or add anything as
value added , it would simply mean that the enterprise is misusing public funds. This concept
represents the wealth distribution in a proper manner besides suggesting how productivity can
increased when reducing the consumption of resources produces same or better outputs.

4.MEASUREMENT OF PROFITABILITY:

The measurement of profitability for a concern is an importance as the earning of profits. This
importance of measuring profitability as been stated by HINGORANI, RAMANATHAN and give
all , “a measured of profitability is the overall measure of efficiency”. Since, profitability is the
outcome of many business activities. Therefore , its measurement is stage concept, as stated
before profitability is a relative concept based on profits. But profits alone cannot express the
concept of profitability. Thus their arises a need to establish the relationship between profit
and other variables , some of the well-known techniques of measurement of profitability are
discussed below :

ACCOUNTING PROFITABILITY:

The most common course of action adopted by a management in measuring profitability is

the several relationships between investment figures and its related income figures are
established. Profitability of a concern depends mainly upto two factors : the rapidity of
turnover of capital employed and the operating profit margin. Profitability is the resultant
figure obtained by the product of these two factors . Hence , profitability can be maximised by
maximizing each i.e., a better profitability level can be achieved by improving the net profit
ratio and turn over ration of an enterprise. In technical terms the combination of profitability
with operating profit margin and turn over is known as the “triangular relationship”. These
significance of this relationship lies not only in the fact that it can be utilised as a tool of analysis
but also because that it can be directly calculated from the earning and investment data. It is
useful in describing the two basic forces bearing upon ultimate results and therefore,
establishes the area of business operations which must be properly controlled, if desired results
are to be realised here, the term operating assets described the capital employed in fixed assets
and current assets . While, operating profit is the income earned from employing this capital in
the business. Where on one side, increasing the net profit and turn over ratios can increase
profitability, there on the other side profitability can also be increased by reducing investment
in fixed and current assets and increasing profits.
WEAKNESS OF PROFITABILITY:

Profitability is a full-fledged measure of evaluating overall business performance. Yet

4remanagement more often comes across certain pitfalls while practicing it. The following are
some of the weak points that emerge in profitability analysis most of the techniques of
profitability are bettered analysed only if a comparative study with the part results of the
business or with the results of a similar business is carried out. The sort of comparison only
provides a glimpse of the past performance. Moreover, forecasts based on part trend may
subjects to time factor, market conditions managements policies etc. Resulting in defective
planning and unexpected results and also the comparison of performance of two companies
operating under different situations creates difficulty, profitability analysis may be recorded as
only a beginning. It makes only a fraction of information required for decisions making. Thus,
the information obtained only from profitability analysis cannot be gainfully interpreted but
most be used in conjunction with information collected from other sources to ensure
comprehensive analysis. Profitability must be looked upon as a means to an end rather then an
end in itself.

Profitability is bound to be a carrier of human limitations. Since, it is a management of

organisation that lands the future course of action after interpreting the resulting already
achieved. Where one management favours a particular course of action the other may not be
at consensus with it like, some manages believe in adopting conservative policy, while some
other prefer behind liberal with records to business policies. More often the interpretation and
analysis is pure matter of managerial skills.

Profitability often becomes a victim of windows dressing i.e., manipulation of accounts in

search a way that it concedes the vital facts in order to present a better position of a firm than
what actually it is example a high total assets turnover indicates the efficiency of management
in making good use of tangible assets. But assets with lower book value and lower
depreciations may result in a misleading figure of high total assets turnover ratio similarly, it is
also considered ideal if current assets are twice the current liabilities but in case of industries
capitally of acquiring needful funds from bankers may be perfectly ideal even if current assets
are equal to current liabilities. Profitability is largely based on ratios of different kinds, which
are composite figures of various figures, where some figures are pertaining to time period other
representation instant of time , still other are average, NELCOM TOM AND MILLER PAUL have
made wonderful remarks in the respect, “A man who has his head in the over and his fact in
the ice-box is on the average comfortable”.

Many of analysis do not old much significance then the average temperature of the room in
which this man sits , Moreover, balance sheet presents figures of balance of accounts at one
moment of the day. It certainly provides only a rough idea of balance during the year and is not
the true representative of typical balance.

1.2 STATEMENT OF THE PROBLEM:

1.3 OBJECTIVES OF THE STUDY:

1.4 SCOPE OF THE STUDY:

1.5 LIMITATION OF THE STUDY:

1.6 NEED OF THE STUDY:

1.7 RESEARCH METHODOLOGY:

Research methodology is a systematic approach in management research to achieve pre -

defined objectives. It helps a researcher to guide during the course of research work. Rules and
techniques are started in research methodology save time and labour of the research as
research know how to conduct the study as per the objective. This study based on SECONDARY
DATA. This study covered the period of the five years from 2015 to 2019.

RESEARCH DESIGN:

A research design is the set of method and procedures used in collecting and analysing measure
of the variable specified in the research problem. The research design followed to study on
profitability performance in JYOTHY LABS.

The following methodologies are adopted for the study:

 Identification of objectives:
The specific objectives of the organisational study where identified and listed out
according to the priority. This helps in concluding the organisational study in an
effective manner.
 Period of the study:
The period of the study was {fill the date}
 Data collection :
Secondary data are used in this study.
 Source of data:
Every research is based on sound facts and data that are collected data by
the searcher, the kind of data collected and the methods used to collect the data as a
very important asset of the research.
 Primary data:
Data observed are collected directly from first-hand experience, using
methods like surveys, interviews, or experiments. It is collected with the research
project in mind, directly from primary sources.
 Secondary data:
The researcher uses both the methods of data collection for his
convenience. But researcher gives more emphasis on secondary data because the
researcher undertake research in financial performance practise for which researcher
needs all annual reports and records from the selected companies ,which are in nature
of secondary data. Researcher must be very careful in using secondary data and make a
minute scrutiny because it is just possible that the secondary data may be unsuitable are
may be in adequacy the context of the problem, which the researcher wants to study,
the researcher must, before using the secondary data.
Typically, a researcher will begin a project by working with secondary data
this allows time to formulate questions and gain an understanding of the issues begin
dealt with before the more costly and time consuming operation of collecting primary
data.