4. Calculation of Net Profit Margin of sample units 4. Calculation of Net Profit Margin of sample units 4. Calculation of Net Profit Margin of sample units
The final step of profit is the calculation of net profit margin. gross profit was the profit in sales after deducting manufacturing cost of goods sold, whereas the operating profit is the profit after deducting the employees cost, administrative overheads and selling overheads from the gross profit. Finally the Net Profit margin is arrived after the gross profit margin and operating profit margin. Net Profit is arrived at after making adjustments on both the sides, i.e. income as well as expenses side. All other income except the operating income and all other expenses other than operating expenses including depreciation are adjusted to arrive at the final profit which we refer to as Net Profit.
The profit margin tells how much profit a company makes for every Re. 1 it generates in revenue. Profit margins vary by industry, but all else being equal, the higher a company’s profit margin compared to its competitors, the better.
Net profit is one of the most important indicators of a company’s efficiency and ability. A high net profit margin will lead to higher payments to the shareholders and thus increasing the shareholders’ wealth. High net profits also mean the company and its products are accepted by the society at large and it could continue its endeavour in serving the society.
Profit is the reward for the efficiency of the management in doing the financial activity. A profit earning business enterprise has the resources and funds to make efforts in the direction of improving the products and services and provide better products and services to the society.
Net Profit Margin Ratio =
Just like the gross profit margins, the net profit margins also vary from business to business and from industry to industry.
Table : 5.3 :
Net Profit to Sales Ratio in Pharmaceutical Companies under Study [in percentage]
Period: 1997-98 to 2004-05
Source: Annual Reports of Companies from the year 1997-98 to 2004-05
The most important profit margin ratio of net profit margin can be considered as the most important indicator of the profitability of any company. Hence this ratio holds much more importance in this study as it focuses basically on the profitability analysis of the selected pharmaceutical companies for the study period.
Net Profit
Sales X 100
Aurobindo Pharma is showing a fluctuating trend in the net profit margin ratio for the study period. It lies between 10.07(1999-2000) and 3.05(2004-05) with an average of 7.61 which is lower than the overall average 12.35 for all the selected companies for the same study period. For the initial three years the company has showed an increasing trend but then there was a fluctuating trend ending at the eight year low of 3.05 in the last year of the study period.
Cadila Healthcare is showing a mixed trend of increasing and little fluctuating in between years. It lies between 13.51(2003-04) and 5.55(97-98) with an average of 10.15 which is lower than the overall average of 12.35 for the same study period. But the positive about the story of Cadila Healthcare is the positive trend in the last three years observed.
Cipla Ltd. is showing a clear declining trend in this net profit margin. Although a very fine Profit margin but the declining nature makes its lesser attractive. It lies between 19.78(97-98) and 15.44(2004-05) with an average of 16.93 which is far better than the overall average of 12.35 for the same study period. The declining trend of the net profit margin ratio can be of serious concerns.
Dr. Reddy’s Laboratories Ltd. is showing a tremendous fluctuating trend in the study period. The margins were stable in the initial years of the study period and improved in the middle part but declined and declined drastically 77% in the last year of the study period. It lies in between 29.53(2001-02) and 3.9 (2004-05) with an average of 16.31 which is better than overall average of 12.35 for the same study period. The sudden decrease in the net profit margin in the last year can be attributed to the decline in sales by 7% and increase in expenses like interest expenses increased by 200%,
miscellaneous expenses increased by 80%, selling and administration expenses increased by 14% and interestingly raw material cost decreased by 5%.
IPCA is showing a mixed trend of fluctuation and increasing trend of net profit margin in the study period. It lies between 12.27 (2003-04) and 5.33(2000-01) with an average of 8.74 which is very low compared to the overall average 12.35 for the same study period. There has been a positive increasing trend observed from the period 2001-02 to 2003-04 but the last year showed a decline which ended the positive trend.
If company can work out properly and continue its positive trend it can definitely improve its margins in the coming times.
Matrix Laboratories is showing a very high fluctuating trend in the net profit margin ratio with a loss in one of the year in the study period. It lies between 22.6(2003-04) and -19.01(1999-2000) with an average of 6.76 which is almost 50% lesser than the overall average of 12.35 for the same period.
Nicholas Piramal has shown a clear positive trend except in two years 2001-02 and 2004-05 where it declined. It lies between 14.62(2002-03) and 7.22(2004-05) with an average of 10.70 which is lower than overall average of 12.35 for the same period.
There is a 50% decline observed in the net profit margin in the last year making it more un-stable in the study period.
Sun Pharmaceuticals has shown a positive trend in the study period except in two year 1998-99 and 2003-04. It lies between 26.43(2002-03) and 16.5(98-99) with an average of 21.59 which is very high compared to the overall average of 12.35 for the same study period. The company has very fine consistency in the net profit margin compared to other companies in the study period which shows that it has fairly good
control over its cost and given no major fluctuations in the prices it can maintain its profit margin pretty consistently.
F – Test (ANOVA) Analysis
In order to establish relationship in the ratio of net profit to sales ratio among different pharmaceutical companies under study during the study period and for establishing relationship in the ratio of net 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 net profit to sales between different companies under study during the study period is same.”
Alternate Hypothesis (H1):- “The ratio of net 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 net profit to sales between different years during the study period in each company under study is same.”
Alternate Hypothesis (H1):- “The ratio of net profit to sales between different years during the study period in each company under study is not same.”
In the following Table 5.3(a) the calculation of F Test (ANOVA) is shown of Net Profit to Sales ratio for the Pharmaceutical Companies under study, during the study period.
Table : 5.3(a)
Table showing calculation of F-Test (ANOVA)
S V d f S. S. M. S. S. F cal
Between
companies 7 1570.006219 224.2866027 6.920023522
Between
Years 7 423.5678938 60.50969911 1.866935145
Error 49 1588.151181 32.4112486
Total 63 3581.725294
The above Table 5.3(a) shows the F value of 6.92 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 there is a significant difference among the different companies under study in the ratio of Net Profit to Sales.
F value of 1.86 at 5% level of significance and at (7,49) degree of freedom is lower than the Table value of 2.16 hence null hypothesis is accepted and alternate hypothesis is rejected, which means that there is no significant difference between different years’ ratios for all the individual companies.
Hence it can be concluded that the net profit to sales ratio among different companies under study is not same but the net profit to sales ratio between different years of each company is same.