2.1.4 Profitability Ratio: Profitability

2.1.4 Profitability Ratio

Lastly, profitability ratio measures the effectively of the company in managing its resources to generate income, identifies the capacity of a company in making profit and provides insight to investor regarding the company performance. Thus, return on assets and return on equity will be computed.

Return on Assets

Return on assets indicates the relationship of the profit and assets. It shows how effectively a company in utilizing its assets to make a profit. Formula for return on assets as below:

Year 2012 2013 2014 2015 2016

Return on Assets 20,489,782/145,611,924=0.1407 24,062,747/167,384,598=0.1438 ( 49,108,536)/227,767,170=0.2156 44,321,803/255,502,556=0.1735 64,848,860/376,309,548=0.1723

Return on assets= (Net

This indicates that for every RM 1 investors have invested in company, they only able to earned RM 0.18. However, its return on equity was improved substantially thanks to increase in net profit in year 2014. The company’s return on equity reached the highest among five years at 0.2809 in year 2014. A return on equity is favorable because it indicates that company is able to generate more returns to the shareholders. In year 2015, return on equity of company showed a decrease trend dues to the decrease of net income. In year 2016, company’s return on equity was increased again to 0.2476. In order to further improve return on equity, company should focus on improving their return on sales. In other words, company need to increase return on sales at a rate faster than the rise of their operating costs. In addition, company may increase their debt capital in order to increase its return on equity. This can be increase the return on equity as long as after tax cost of debt is lower than its return on

Reason to be a good signal was company was financially strong and they have high capability in meeting their obligation. Reason to be a bad signal was the probability of company’s management has run out of investment opportunities was high and it also will increase company’s opportunity cost. Therefore, ViTrox should work out an appropriate cash level by taking into consideration of company cash flow, expenditure, contingency fund and etc. in order to reduce company’s opportunity cost. In year 2015, company was started inefficient in using its asset to generate sales. In addition, for the past five years, company’s average collection period was fluctuated. These ratios are rely on the efficient of the employees and also can be improved by employees. Company’s employees should take these as their responsibility or include these in their Key Performance Index (KPI) in order to motivate them and increase their efficiency as well as improve the company’s activity