3. Calculation of Operating Profit Margin for sample 3. Calculation of Operating Profit Margin for sample 3. Calculation of Operating Profit Margin for sample units
units units units
Among the various measures of profitability, this ratio has got its own importance.
Operating profit margin is calculated in order to find the operating efficiency of the company. When total operating costs are deducted from total operating or business income the result is Operating Profit or Operating Loss. The name itself suggests that the result which is obtained from the operations of the business is the Operating Profit Margin. In this study we have tried to calculate the Operating Profit Margin by adjusting all the operating expenses against operating income.
The expenses that are adjusted to gross profit margin are Employees Cost, which includes Salaries, Wages, Bonus, Contribution to funds, Staff welfare expenses, VRS compensation, Gratuity and other employee costs. Second expense head that has been
adjusted to find out operating profit is Selling and Administrative Expenses, which includes Insurance Expenses, Advertisement Expenses, Marketing Expenses, Distribution Expenses, Legal Expenses, Selling Expenses, Communication Expenses, Travel Expenses, Audit Expenses, Printing and stationery, Technical fees and other administrative expenses.
Operating Profit Margin Ratio =
Table : 5.2:
Operating Profit to Sales Ratio in Pharmaceutical Companies under Study [in percentage]
Source: Annual Reports of Companies from the year 1997-98 to 2004-05
Aurobindo Pharma is showing a fluctuating trend of Operating Profit Margin Ratio for the study period. It lies between 15.28(2003-04) and 7.95(2004-05) with an average of 12.07 which is very low compared to overall average of 16.64 for the same study
Sales Operating profit
period. The company could never get stability as far as its operating profit margin is concerned and this should be of serious concerns to all the stakeholders.
Cadila Healthcare is showing a mixed trend for the operating profit margin in the study period. As there is a positive trend observed in the initial years for three years and then there is a continuously downtrend observed for the rest of the years. The highest is 16.30 (1999-2000) and lowest is 12.1 (2003-04) with an average of 14.73 which is lower than overall average of 16.64.
Cipla Ltd. is very consistent for the initial five years but the last three years were not equally good for the company as the operating profit margin started to decline in the last three years. Although the decrease is not too sharp but it can damage the average of the company. The ratio lies between 23.29 (1997-98) and 16.4 (2003-04) with an average of 19.89 which is better than the overall average of 16.64 but company need to rectify its declining trend and then it can continue its success story.
Dr. Reddy’s Laboratories has shown a mixed trend but the latter years proved to be worst for the company. The margins were best in the year 2001-02 35.05 but after that a serious fall has been observed which was as low as 7.18(2004-05) and hence the average works out to be 21.83 which is although better than overall average of 16.64 but the figures are not that reliable. Company needs to improve a lot on its operating margins.
IPCA Labs. is showing a mixed increasing trend in the study period. The best part is the stability of its operating margins in the latter part of the period. The margins lie between 14.65 (2002-03) and 7.78(2000-01) with an average of 11.48 which is lower
than overall average of 16.64 but if IPCA continues its success story than it can do wonders for all the stakeholders.
Matrix Laboratories Ltd. has again a sad story to narrate especially with a loss in the study period but after that it has tried to recover a lot in the last five years and improved its operating margins to a great extent. Its eight year low is -8.65(1999-2000) and high is 30.58(2002-03) with an average of 12.42 which is lower than the overall average of 16.64 for the same study period. Rather than the average the fluctuations in the initial period can be of serious concerns. But there is a ray of hope if company continues with its positive trend in the coming years.
Nicholas Piramal is showing a fluctuating trend for the operating margins in the study period. It lies between 17.18(97-98) and 10.74(2004-05) with an average of 15.89 which is not much lower than overall average of 16.64 but the fluctuations can make it an unstable company as far as operating margins are concerned.
Sun Pharmaceuticals a very fine consistent and positive trend for the study period.
Except a decline in the last year it has shown either positive or constant trend. It lies between 29.57(2003-04) and 20.58(1998-99) with an average of 24.78 which is far better than the overall average of 16.64 by any means. The company can do wonders if it continues its increasing trend of its operating profit margin ratio.
F – Test (ANOVA) Analysis
In order to establish relationship in the ratio of operating profit to sales ratio among different pharmaceutical companies under study during the study period and for establishing relationship in the ratio of operating profit to sales ratio among different
years for each (individual) company, F-Test ANOVA is used. The statements of hypothesis for the comparison among different companies and for comparison among different years for individual companies during the study period are as under:
Hypothesis for comparison between different companies:-
Null Hypothesis (H0):- “The ratio of operating profit to sales between different companies under study during the study period is same.”
Alternate Hypothesis (H1):- “The ratio of operating profit to sales between different companies under study during the study period is not same.”
Hypothesis for comparison between different years:-
Null Hypothesis (H0):- “The ratio of operating profit to sales between different years during the study period in each company under study is same”
Alternate Hypothesis (H1):- “The ratio of operating profit to sales between different years during the study period in each company under study is not same.”
In the following Table 5.2(a) the calculation of F Test (ANOVA) is shown of Operating Profit to Sales ratio for the Pharmaceutical Companies under study, during the study period.
Table : 5.2(a)
Table showing calculation of F-Test (ANOVA)
S V d f S. S. M. S. S. F cal
Between
Companies 7 1386.43145 198.0616357 5.160853458
Between
Years 7 289.832625 41.40466071 1.078873178
Error 49 1880.506825 38.37769031
Total 63 3556.7709
The above Table 5.2(a) shows the F value of 5.16 at 5% level of significance and at (7,49) degree of freedom for different pharmaceutical companies under study during the study period which is greater than the table value of 2.16 hence the null hypothesis is rejected and the alternate hypothesis is accepted, which means that among the different companies under study the ratio of operating profit to sales are not same. F value of 1.07 at 5% level of significance and at (7,49) degree of freedom is smaller than the Table value of 2.16 hence null hypothesis is accepted and alternate hypothesis is rejected, which means that different years’ ratios for all the individual companies are same.
Hence it can be concluded that the operating profit to sales ratio among different companies under study are not same but the operating profit to sales ratio between different years of each company is same.