FINANCIAL RATIO ANALYSIS
Operating Profitability Ratios
Gross Profit Margin
Gross profit margin is used to compare a company with its competitors. A higher gross profit margin indicates that a company can make a good profit provided it keeps its overhead costs under control whereas a lower gross profit margin indicates that the company is unable to control its production costs. Ideal gross profit margin depends on the industry.
From the above graph, the gross profit margin has shown a decreasing trend over the last ten years with minor increase in the years 2008 and 2010. The decreasing trend is due to the increase in relative manufacturing costs of their products than compared to the relative increase in net sales. Increase in the cost …show more content…
ROA measures the efficiency of a company’s ability to manage its assets to produce profits. POSCO has increased their assets throughout the last ten years by starting new plants, acquiring land for these plants (e.g.: Odisha land acquisition). This increase in assets significantly reduced the ROA of 22.05% in 2004 to 3.05% in 2013.
Return on Capital
Investors use this ratio to see how efficiently the company uses their capital. ROC measures the efficiency of a company to use its money invested in its operations. From the above graph it can be seen that ROC has decreased from 27.8% in 2004 to 4.01% in 2013. The increase in ROC in the year 2008 was due to POSCOS’s higher than expected profit margin during recession while the decrease in 2009 was expected as capital employed increased even more as POSCO was one of the few companies to show a high return during the recession.
Return on Owner’s …show more content…
The above graph shows a huge decline in POSCO’s ROE. The increase in net income couldn’t catch up to the increase in shareholders’ equity. The ROE increased in 2008 due to a decrease in shareholders’ equity (scare of recession). Since POSCO showed good returns in 2008 the investments increased which led to a decline in ROE.
Earnings per Share (EPS)
Earnings per share gives the profit allocated to each of the shareholder with one share. EPS serves as the indicator of the company’s profit abilities. Earnings per share for a company depends on the net profit. As the net income of a company increases, the earnings per share also increase. Higher the EPS, better for the company. POSCO has maintained an acceptable EPS from 2004 to 2011 which can be seen from the graph above. The EPS of 2012 showed a decline when compared to the previous year due to a decrease of net income by USD 887 million in 2012 when compared to 2011’s net income. Similarly, EPS reduced further in 2013 due to a decrease of nearly USD 986 million when compared to 2012’s net income.
Decomposition of ROE – DuPont Analysis
DuPont analysis decomposes ROE into the following three
Operating Profitability Ratios
Gross Profit Margin
Gross profit margin is used to compare a company with its competitors. A higher gross profit margin indicates that a company can make a good profit provided it keeps its overhead costs under control whereas a lower gross profit margin indicates that the company is unable to control its production costs. Ideal gross profit margin depends on the industry.
From the above graph, the gross profit margin has shown a decreasing trend over the last ten years with minor increase in the years 2008 and 2010. The decreasing trend is due to the increase in relative manufacturing costs of their products than compared to the relative increase in net sales. Increase in the cost …show more content…
ROA measures the efficiency of a company’s ability to manage its assets to produce profits. POSCO has increased their assets throughout the last ten years by starting new plants, acquiring land for these plants (e.g.: Odisha land acquisition). This increase in assets significantly reduced the ROA of 22.05% in 2004 to 3.05% in 2013.
Return on Capital
Investors use this ratio to see how efficiently the company uses their capital. ROC measures the efficiency of a company to use its money invested in its operations. From the above graph it can be seen that ROC has decreased from 27.8% in 2004 to 4.01% in 2013. The increase in ROC in the year 2008 was due to POSCOS’s higher than expected profit margin during recession while the decrease in 2009 was expected as capital employed increased even more as POSCO was one of the few companies to show a high return during the recession.
Return on Owner’s …show more content…
The above graph shows a huge decline in POSCO’s ROE. The increase in net income couldn’t catch up to the increase in shareholders’ equity. The ROE increased in 2008 due to a decrease in shareholders’ equity (scare of recession). Since POSCO showed good returns in 2008 the investments increased which led to a decline in ROE.
Earnings per Share (EPS)
Earnings per share gives the profit allocated to each of the shareholder with one share. EPS serves as the indicator of the company’s profit abilities. Earnings per share for a company depends on the net profit. As the net income of a company increases, the earnings per share also increase. Higher the EPS, better for the company. POSCO has maintained an acceptable EPS from 2004 to 2011 which can be seen from the graph above. The EPS of 2012 showed a decline when compared to the previous year due to a decrease of net income by USD 887 million in 2012 when compared to 2011’s net income. Similarly, EPS reduced further in 2013 due to a decrease of nearly USD 986 million when compared to 2012’s net income.
Decomposition of ROE – DuPont Analysis
DuPont analysis decomposes ROE into the following three