Question

Anyone can help me answer this question around 300 words each with typing and with link!!! need it asap!!! (finance statement analysis)

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Profitability Analysis What does profitablilty analysis mean to you? Why do companies analyze profits? What is Analysis? Do you believe that it is necessary to analyze profits? Answer these questions and provide an article link that supports each of your answers.

Answer 1

Businesses are set up with the broadly two objectives: First, to create Wealth (It means to increase value for Owners, Employees, Shareholders, Suppliers, Customers and each & every person working for the firm/company) and Secondly, to generate profits. No one would like their Firm / Company in Red. Thus, profits are an integral part to look at the business from a neutral prospective.

Profitability Analysis is basically Analysing various profits from various stakeholders’ point of view. Profitability Analysis can be further divided into General Profitability and Overall Profitability. General Profitability analyses operating profitability of the firm for e.g. EBITDA/Net Sales also known as Operating Profit Ratio. Overall profitability on the other hand analyses what Returns are the various stakeholders getting from Investing in the business for e.g. Return on Capital Employed or Return on Investment wherein we divide EBITDA with Total Capital Employed/Total Assets of the Firm. Overall profitability also provides comparison of Net Profit after Tax with Equity employed in the Business.

There are various profits which are derived from the income statement these are the following: a) EBITDA (Earnings Before Interest Tax Depreciation & Amortisation); b) EBIT (Earning Before Interest & Tax); c) EBT (Earnings before Tax); d) EAT (Earnings after Tax); e) Gross Profit (Sales-COGS/Direct Cost). The need for these various Earnings / Profit parameters arise because comparison needed to be done in a non-partisan way. Example if I am an equity shareholder I would like to know the earnings after payment of Taxes & preference shareholders divided as it is the amount left for me to have stake into. The banker would be interested in knowing EBIT number as it is from this number interest will be paid to him. To conclude my first answer Profitability Analysis means comparing relevant variable with profit to make an understanding of the performance of the business at the given period.

Ans 2. Companies analyse profits because by mere overviewing the level of activity in the company floor or office it is difficult to judge the performance of the company. The company might be producing a lot but without adequate sales and cost control measure it could turn out to be a fatal operation. Shareholders invest in companies in lieu of some return which more than risk free return is available in the money market. This return on investment is nothing but PAT/Shareholders Equity. This should be the minimum benchmark with which every vertical of the company should focus to work on. The return which is investigated before taking up the project is being compared with ROI if it is more than ROI then only the new projects are commissioned. If the companies do not analyse the profits made in a given period they would have no clue regarding their performance in that period.

Ans 3. Analysis literally means to examine, study, investigate, scrutinize and other such synonyms. In our case it is the profits of the company which needs to be analysed. It is a point to be remembered that profits are the derivative from the various operations performed by the company in each period. Analysing the output which is Profit also tells the company which factors have influenced its increase or decrease over the previous period. Analysis can be done in financial term by using two or more variables in such a manner that it results in a logical conclusion / understanding for a person analysing it. We have mentioned the importance of Analysis in our previous two answers.

Ans 4. We do believe that it is necessary to analyse profits as without profits been analysed they are just numbers with no meaning or direction. The comparison of profits with other relevant variables gives the meaning to it which is necessary for a operation manager to streamline operations, finance manager to cut finance costs, investors to invest or pull out from the company. It is the profit analysis which provides light whether the company is on the path of growth or is on a verge of decline. The alarms and the positives are activated only by doing prudent profit analysis.

The link is :http://shodhganga.inflibnet.ac.in/bitstream/10603/705/16/17_chapter8.pdf