PROFITABILITY

COMPANY 1.
company 1. company 1
I. I NDI CATOR ON P ROF I TABI LI TY 2021 2020
1 I ndi c at or on pr of i t mar gi n 0.45 0.55

2 I ndi c at or on r et ur n on As s et s 2.60 1.98

3 I ndi c at or on r et ur n on engage d c api t al 2.23 2.22

1.Indicator of gross and net profit margin

Profit margin gauges the degree to which a company or a business activity makes money,
essentially by dividing income by revenues. Expressed as a percentage, profit margin indicates
how many cents of profit has been generated for each dollar of sale. A higher profit margin
indicates greater price flexibility that the firm has in its operations. So as its seen in the table
above, Company.1 it is in a better situation in 2020 compared with 2021 based on the respective
rations 55% and 45%. To understand better the ratio let’s take this example, if an item costs $100
to produce and is sold for a price of $200, the price includes a 100% markup which represents a
50% gross margin. Gross margin is just the percentage of the selling price that is profit. In this
case, 50% of the price is profit, or $100.

2.Indicator of return on assets

The ratio is important because investment in assets is very significant for most firms, but the
question is how useful it is for the firm. Return on assets is a metric that indicates a company's
profitability in relation to its total assets. ROA can be used by management, analysts, and
investors to determine whether a company uses its assets efficiently to generate a profit. You can
calculate a company's ROA by dividing its net income by its total assets. As seen in the table
above respective ratios for Company.1 for 2020 and 2021 are 1.98 and 2.60, that means that
every dollar that C.1 invested in assets generated 1.98/2.60 cents of net income.

3.Indicator on Capital engaged

 This ratio can help to understand how well a company is generating profits from its capital as it
is put to use. Ultimately, the calculation of ROCE tells you the amount of profit a company is
generating per $1 of capital employed. The more profit per $1 a company can generate, the
better. As seen in the table above the ratios for C.1 for 2020 and 2021 are 2.22 and 2.23. So we
assume almost the same situation in both years.
COMPANY 2.

company 2.
I. INDICATOR ON PROFITABILITY
0.3
1 Indicator on profit margin 7
0.7
2 Indicator on return on Assets 8
0.7
3 Indicator on return on engaged capital 6

1.Indicator of gross and net profit margin

A ratio of 37% of profit margin means 37 cents of profit has been generated for each dollar of sale. In
most cases this ratio is explained as  a good margin will vary considerably by industry, but as a
general rule of thumb, a 10% net profit margin is considered average, a 20% margin is
considered high (or “good”), and a 5% margin is low. So in our case C.2 it is in good situation.

2. Indicator of return on assets

A ratio of 0.78 means that Company 2. for every dollar that invested in assets generated 0.78$ of
net income. This indicator shows how good it is the management of the company to use the
assets to generate income.

3.Indicator on Capital engaged

The calculation of ROCE tells you the amount of profit a company is generating per $1 of capital
employed. This gives a more realistic picture of the company’s ability to generate income with
all the capital it has at its disposal. A ratio of 0.76 in C.2 means that for every dollar invested in
capital, the company generated 76 cents in operating income.