Profitability Analysis of A Company

1041 Words3 Pages

Profitability Analysis: The ratio analysis reveals that over the years, the profitability of the company is improving. In terms of net profit margins, the company has made an applausable leap from -25.8% to 2.6% over the years.(2009-2013 ) This year the net profit margin of the company has surpassed industry benchmark of 2%. Analyzing the ratios relating to decomposition of profit figures provides us with a better picture relating to working of the company over the years. Both Gross Profit Margins and Operating Margins have increased gradually over the years. Also in comparison to industry benchmarks, the results have been good in recent years. In comparison to Gross Profit and Operating Margin Ratio benchmark of 22.8 % and -6.6% respectively, Electronics Arts have Gross Margin of and Operating Margin of 63.4% and 5% respectively. However, the only area of profitability where the company lacked in comparison to industry benchmarks was Comprehensive Income Growth. The comprehensive income growth of the company was -.2% while that of industry was 2%. Risk Factors: Measuring risk factors in the company in the form of Liquidity, Solvency, Asset Turnover and Bankruptcy Risks we had the following observations for the company: Liquidity Risk: Measuring the liquidity position of the company through current ratio and quick ratio, we found that over the years the company has been struggling with its liquidty as the ratios have been been consistently decreasing. However, the ratio of operating cash flow to current liabilities indicates that the condition seems to be improving with increased percentage as against 2012. Solvency Risk: Solvency Ratios indicate the extent to which an organization is exposed to financial risk. Analyzing the solvency ratios we find that the company is getting exposed to more and more financial risk over the years. Where by the end of 2011, company was operating in zero debt structure but now the debt equity ratio is 23%. Also the interest coverage ratio has been low in comparison to industry standards, although a slight improvement in this ratio during 2013 was noticed. Overall the group of solvency ratios indicates that over the years the financial risk in the company is on rise. Bankruptcy Risk: Measured by non-conventional set of ratios, these set of ratios indicate that during 2013 company has shown improvement in terms of Bankruptcy Probability and Earning’s Manipulation with these ratios going low during 2013. The company prepares it financial statements as per Generally Accepted Accounting Principles(GAAP) and makes assumptions and estimates that affect the reportin our consolidated financial statements.

Open Document