11 - Chapter 5

Profitability Analysis
Chapter 5
5.1Concept of Profit
Profit is the blood of every type of business, without profit business is lifeless.
Most business enterprises exist with the object of earning profits. The task of
organization is maximization of profits. “Profit is the difference between total
revenues and total expenses over a period of time. Profit is the ultimate „Output‟ of a
company and it will have no future if it fails to make sufficient profits.”1
Profits are derived from two sources. Firstly, from operation and secondly from
various non-operating activities related to financing or disposal of assets. According
to Gibson and Boyer, “Profitability is the ability of the firm to generate earnings.”2
Profit is the engine that drives the business enterprise. The efficiency of a business
enterprise is measured by the profit earned. Profit is necessary for every company to
survive in long run. For accounting purposes, profit is the difference between total
income and total expenses. “The principal motivating factor behind conducting
business is profit. Perhaps most important reason for keeping accounts, as far as the
management of a business is concerned is the information contained in them provides
the means of measuring the progress of the business of testing its pulse and indicating
when and where remedial action, if necessary shall be taken.”3 The profit of a
business not only affects its owners but also affect the income tax authorities,
managers, directors etc. Therefore the question is: what is profit? Profit denotes the
surplus of income more than the expenditure during a particular time. It can also be
constructed to mean the excess of assets over liabilities and capital between two
periods.
According to Chakraborty, “The terms profitability and profits are used

synonymously but there is difference between the two. The term profitability has a
sense of relatively, whereas the term profit is used in absolute sense.”4
From the accounting point of view, profit shows the excess of income over
expenses. In the words of F.P. Langley, “Profit is not the surplus of receipts over
payments, but the surplus of revenue over expenses. If total expenses are greater than
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the revenue there will be loss. By revenue is meant what the business earns in the
period under review, usually from the goods or services it has sold.”5
5.2 Importance of Profit
Continuity of business depends upon profit. The basic aim in free economy
system is to earn higher profits and in socialistic pattern of society to earn nominal
profit which is essential for existence of business enterprise. Profit is the yardstick for
assessing operational efficiency of an enterprise. The economy of a country can be a
beneficial for the society only when it is profit oriented.
Profit is an important guideline of business activities for best utilisation of

resources available to the business. The greater volume of profit is an index to show
the efficient operation of the business. The main purpose of conducting business is
profit earning. Without profit motive the existence of business is unpredictable.
The importance of profit is not related with a particular point of view. The
entrepreneur treats the profit as reward for his risk taking and adopting innovative
measures and implementation of diversified programmes. The investors and creditors
treat the profit as safety instrument against their investment. The government treats
the profit as basis for taxation and exercise price control in controlled economy
system. Hence the profit plays diversified role for all concerned.
5.3Relationship between Profit and Growth
There is a clear relationship between profit and growth of an enterprise. Growth is

an essential part of its existence. Growth is directly dependent upon profit The
competition and improvement in product have also compelled the growth. Profit
measures the net effectiveness and soundness of business‟s effort. Profit is the
premium that covers the costs of staying in business, replacement, obsolescence
market and technical risk and uncertainty.
In view of forgoing quotations it is very much clear that various renowned

economists have accepted that there is an unfavourable relationship between profit
and growth of a business. Each one is compliment to another. One must always think
of growth of a business with reference to its profit.
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5.4Concept of Profitability
Profitability is a source to determine the operational efficiency of a business. It is

the magic eye that can measure operating efficiency of the whole business. The return
on capital employed can be the best judges by profit not by the investment made by
all the investors.
According to different analysis profitability can be measured in different ways

which are following:-
(i) Profitability regarding management

(ii) Profitability regarding shareholders
(iii) Profitability regarding creditors
(iv) Profitability regarding customers
In view of the management the profitability is the money that is earned on the
investment capital. If the invested capital generates the profit, it can be treated as
profit. According to new market researches if the sale is increasing day by day and
payment of operating expenses made regularly than it can be termed as the efficiency
of management.
In view of shareholders the profit is the money (dividend) they earn after the
payments of tax and interest of the company. For getting this money they can analyse
their investment time to time and evaluate their invested capital growth regularly.
In view of the creditors, profit is that interest they received from their loans and
expenditure incurred by them. They also want to confirm the repayment of their loans
and get the interest regularly.
In view of the customers the profit is to get the best quality and goods at the
minimum price. They also need of new improved design of goods by which they can
live the luxurious life. Generally the customer purchases the standard quality of goods
in the name of enterprise like trademark and the service provided by the company
after sale services.
Profitability is a standard for the performance of an enterprise and it indicates

public approval of the commodities. In the words of Weston and Brigham,
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“Profitability is the net result of a large number of policies and decision.”6

Profitability is based on operating performance and efficiency of business. Bad
operating performance show reduced sales and reduced profits. Profitability is a
measure of efficiency and the search for it provides an incentive to achieve efficiency.
Profitability also indicates public acceptance of the product and shows that the firm
can produce competitively.
The term „profitability‟ should be distinguished from „profit‟. Profit refers to

absolute quantum whereas profitability refers to the ability to earn profit i.e. a
quantum. Profits and profitability play the same role in business as blood and
pulsation in human being. The survival of a human being is not possible in the
absence of adequate blood and the ability to generate blood. The same may be applied
to business. It is very difficult for a firm to survive without the prospectus and the
capacity to get adequate returns. Without profit the existence of a firm is like a body
without the backbone.
5.5Importance of Profitability
Profitability is analysed with reference to operations of business, keeping in mind,

short term and long term objectives both. While in short term profitability helps in
continuance of business operations like product mix etc. The trend of profitability
helps in managerial decision making for expansion programmes in long run.
Profitability measurement is important for different categories of people with

different points of view. Profitability analysis can be internal because it is related with
analysis of internal working of a business. The financial advisor is able to guide the
management on various operational aspects with the help of profitability measurement
and its analysis.
The owners can measure the worth of their investments as ability to get a return.
The employees are concerned with their wage rates, bonus and other fringe benefits.
Proper measurement and analysis of profitability satisfies the employees for they are
getting at present. If there is some surplus in profitability the employees can justify
their new demands. The creditors can rely on profitability and treat their investment
safe.
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Profitability is an important factor for all concerned with a particular business

enterprise, either directly or indirectly. Profitability figures are taken as indicators of
business activity in a particular industry and of many industries as whole. It helps in
long term planning by the government like five year plan.
5.6Relationship between Profitability and Operational Efficiency
The profitability is directly related with operational efficiency of an enterprise.

The operational efficiency is judged by capacity utilization and cost of production
with relation to sales value. If the capacity utilisation is higher than pre-fixed target it
will reduce per unit cost of fixed overhead charges which directly adds to
profitability. On the other hand if the capacity utilisation is less than its targets, it
would be difficult for the enterprise to recover full costs on fixed overheads. This
situation will bring down profitability of business and sometime may lead to loss
instead of profit.
Operational efficiency is related to the profitability which is the percentage of

total cost to net sales value. In case of competition and inflation it becomes difficult to
charge higher selling price whereas the same time the manufacturer is compelled to
pay higher costs of raw material and higher wages. The situation directly affects the
profitability of an enterprise.
Management should decide and implement various measures to attain maximum

operational efficiency which is expected to give maximum profitability side by side.
Operational efficiency can be helpful in enhancing profitability by way of reduction in
per unit cost of raw material and to exercise necessary control on administrative and
selling expenses.
5.7Analysis of Profitability
Profitability analysis helps in critically analyzing and interpreting the current and
prospective earning capacity of business corporations. In the process of analysis and
interpretation certain methods are adopted to measure more systematically the trends
of business profits. Profitability analysis owing to its methods enables both official
and unofficial agencies to measure the trends of profits, to construct a number of
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indicators of business activity and to analyze, evaluate and interpret in right

perspective the earning capacity of a business house.
To maximize the firm‟s profits there is a trade-off between return (profit) and risk.
If more risk exist in a decision, the greater the expected profit. Some persons invest in
bank deposits while others are willing to get more risk and invest in shares. Some
firms are more willing than other firms to accept the high risk in order to get high
potential profit. In making a decision the firm is faced with the trade-off – “risk vs.
return”
Profitability analysis is external because it helps the external users of accounting

information pertaining to particular business concern viz. stock holders, bond-holders,
potential investors, bankers and other creditors and government agencies in measuring
its economic wealth by its earnings.
The profitability of an undertaking may be measured by means of different

techniques. But a ratio technique is one of the best and the most understandable
techniques to measure the profitability of any concern. The result of ratio analysis is
of particular interest to those potential creditors or owners who are contemplating
long-term commitments in the business under consideration as well as to management
in judging its own effectiveness.
There are two types of profitability ratios:-
(i) Profits in relation to sales
The firm is able to make sufficient profit on each element of sales. If there is no
sufficient margin of profit in sales then it is not easy for the firm to include its fixed
charges on debt and to earn a profit for shareholders. The ratios in this category are
Gross Profit Ratio, Operating Ratio, Operating Profit Ratio and Net Profit Ratio.
(ii) Profits in relation to Assets
The profit is compared with the capital invested by owners and creditors. If the
firm cannot make an adequate profit on its asset, it may be misusing its assets. The
ratios in this category are return on capital employed, Return on proprietors fund and
Return on total assets.
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5.8Profitability Ratios
Profitability ratios are designed to calculate the operating efficiency of business.

All the profitability ratios are termed as causal ratios, since a change in profitability
will certainly, sooner or later bring about a change in the financial position. The
purpose of analysis of profitability ratio is to help in assessing the sufficiency of
profits earned by the company and also to determine whether the profitability is
increasing or decreasing. Profitability ratios are measured with sales, capital
employed, total assets employed, share holders funds, etc.
Profitability ratios are of two types: those showing profitability in relation to sales
and those showing profitability in relation to investments. The profitability ratios in
relation to sales are profit margin and expenses ratio. The ratios in relation to
investment can be measured by return on assets, return on capital employed and return
on shareholder‟s equity.
5.9Application of Profitability Ratios
For testing the profitability position of selected aviation companies, the following
ratios have been calculated and to test the significance of difference between two
sample means independent sample t-test is calculated. To check whether the variances
are equal or not, Levene‟s test for equality of variance is used. ANOVA is used as an
extension of independent sample t-test to know which means have to significant
difference.
The following hypothesis has been formulated:
H0 (3): There is no significant difference between Profitability Position of Airline
Companies.
H1 (3): There is a significant difference between Profitability Position of Airline
Companies.
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5.9(i) Operating Ratio
The operating ratio measures the operational efficiency of the business enterprise.
It establishes the relationship between the cost of goods sold plus operating expenses
to net sales. The total operating expenses include the cost of goods sold,
administrative and general expenses, selling and distribution expenses but excluding
financial charges, income tax and non operating expenses. This ratio is related with
cost structure of the firm.
In interpreting the operating ratio full recognition must be given to the possibility
of variations in the expenses from the year to year or due to change in policies. A
higher operating ratio is regarded as unfavourable because a very low amount of
operating profit is left to meet interest and dividend etc. A low operating ratio is a real
test of operating efficiency of an enterprise. Guthman remarks, “The operating ratio
should be low enough to leave a fraction of the sale rupee sufficient to give a fair
return to the investor.”7
Operating ratio is computed by dividing the operating cost by sales. As a formula

it can be expressed as:
Operating Cost
Operating Ratio= x 100
Net Sales
Table 5.1
Operating Ratio of Public and Private Airline companies
(From 2007-08 to 2012-13)
(Percentage)
Year Public Company Private Companies
Air India Spice Jet Jet Airways
2007-08 130.91 157.76 105.96
2008-09 133.62 122.47 110.26
2009-10 126.49 96.56 97.91
2010-11 128.78 96.45 94.01
2011-12 125.26 114.20 104.57
2012-13 123.75 105.99 99.79
Mean 128.14 115.57 102.08
G. Mean 128.14 108.83
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S.D. 3.70 23.01 5.93

Comb. S.D. 3.70 18.11
C.V. 2.89 19.91 5.81
G. Mean= Grand mean, SD= Standard Deviation, CV= Coefficient of variance.
Source: Annual Reports of the public and private airline companies under study.
Figure 5.1
Operating Ratio of Public and Private Airline Companies
450
400
350
300
250 Air India
200 Jet Airways

Spice Jet
150
100
50
0
2007-08 2008-09 2009-10 2010-11 2011-12 2012-13
Table 5.1 demonstrates that operating ratio of public company Air India showed a
fluctuating trend. It was highest in 2008-09 (133.62%) and lowest in 2012-13
(123.75%). Its average ratio was 128.14%. Spice Jet showed decreasing trend in the
initial four years of the study period i.e. from 2007-08 to 2010-11 and in the year
2011-12 it showed a slight increase and in the year 2012-13 again it decrease. It was
highest in 2007-08 (157.76%) and lowest in 2010-11 (96.45%). Its average ratio was
115.57%. Jet Airways exhibited a fluctuating trend throughout the period of study. It
ranged from 110.26% (2008 -09) to 94.01% (2010-11). Its average ratio was
102.08%. The combined average operating ratio of private companies was 108.83%.
Comparing the average operating ratio of public and private companies it was
found that the ratio of public company (Air India) is higher than private companies.
Private companies show better position because of greater profitability and the public
company has very less profit margins for the purpose of payment of dividend and
creation of reserve. With the application of combined coefficient of variance Air India
128
showed least variation in its operating cost. Air India is stable than Spice Jet and Jet
Airways.
Table 5.2
Table Showing Results of Independent Samples Test for Operating
Ratio
Significance Level: 5 Percent
Levene's
Test for
Equality of
Variances t-test for Equality of Means
95%
Std. Confidence
Sig. Mean Error Interval of the
(2- Differen Differ Difference
F Sig. T df tailed) ce ence Lower Upper
Equal
variances 5.280 .044 3.327 10 .008 19.3074 5.8038 6.3756 32.2393
assumed
Equal
variances
3.327 5.722 .017 19.3074 5.8038 4.9370 33.6779
not
assumed
Conclusion:
The significant value of Levene‟s test (0.044) is less than the 0.050; we assumed that
variances are not equal. An unequal variance t-test þ value 0.017 is less than α value
0.050, we reject the null hypothesis. We conclude that there is statistically significant
difference between operating ratio of selected companies with mean
(Public = 128.135, Private = 108.27) and standard deviation (Public = 3.69 & Private
13.72).
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Table 5.3
Table Showing Results of One Way ANOVA for Operating Ratio
Significance Level: 5 percent
Sum of Squares df Mean Square F Sig.
Between Groups 2036.924 2 1018.462
Within Groups 2892.540 15 192.836 5.281 .018
Total 4929.464 17
Tukey HSD
95% Confidence
Mean Interval
(I) (J) Difference Std. Lower Upper
Company Company (I-J) Error Sig. Bound Bound
Air India Spice Jet 12.56333 8.01740 .290 -8.2616 33.3883
Jet Airways 26.05167* 8.01740 .014 5.2267 46.8766
Spice Jet Air India -12.56333 8.01740 .290 -33.3883 8.2616
Jet Airways 13.48833 8.01740 .244 -7.3366 34.3133
Jet Air India -26.05167* 8.01740 .014 -46.8766 -5.2267
Airways
Spice Jet -13.48833 8.01740 .244 -34.3133 7.3366
*. The mean difference is significant at the 0.05 level.
Tukey HSDa
Subset for alpha = 0.05
Company N 1 2
Jet Airways 6 102.0833
Spice Jet 6 115.5717 115.5717
Air India 6 128.1350

Sig. .244 .290
Means for groups in homogeneous subsets are displayed.
a. Uses Harmonic Mean Sample Size = 6.000.
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Conclusion:
Since the significant þ value of one way ANOVA 0.018 ˂ 0.05 @ α 0.05, df (2, 15).
We reject the null hypothesis and conclude that there is significantly difference
between operating ratio of selected aviation companies. The Tukey post hoc test
indicates that operating ratio is differ between Air India & Jet Airways.
5.9(ii) Operating Profit Ratio
Operating profit ratio is a modified version of net profit to sales ratio. This ratio is
very important for growing business and reflects the efficiency. It is the yardstick of
operational efficiency of an enterprise. Kennedy remarks, “A high operating ratio is
the sign of good management.”8 It can also be obtained by subtracting operating ratio
from 100. This ratio is very useful for the purpose of internal analysis in detecting the
areas of difficulty. Operating profit ratio is measurement of the management
efficiency. It compares the quality of a company‟s activity to its competitors.
It establishes the relationship between operating profits and net sales. The
operating ratio is calculated by this formula:
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Operating Profit
Operating Profit Ratio= x 100
Net Sales
Operating profit is calculated by subtracting all direct and indirect expenses

related to main business for net sales. In other words, operating profit is gross profit
less all operating expenses.
This ratio indicates the operational efficiency of the business. The higher the
operating profit ratio, the better would be the operational efficiency of the firm. A
higher operating profit ratio means that a firm has been able not only to increase its
sales but also been able to cut down its operating expense.
Table 5.4
Operating Profit Ratio of Public and Private Airline companies
(From 2007-08 to 2012-13)
(Percentage)
2007-08 -30.91 -57.76 -5.96
2008-09 -33.62 -22.47 -10.26
2009-10 -26.49 3.44 2.09
2010-11 -28.78 3.55 5.99
2011-12 -25.26 -14.20 -4.57
2012-13 -23.75 -5.99 0.21
Mean -28.14 -15.57 -2.08
G. Mean -28.14 -8.83
S.D. 3.70 23.01 5.93
Comb. S.D. 3.70 62.72
C.V. -13.15 -147.78 -285.10
G. Mean = Grand mean, SD= Standard Deviation, CV= Coefficient of variance.

Source: Annual Reports of public and private airline companies under study.
132
Figure 5.2
Operating Profit Ratio of Public and Private Airline Companies
10
0
2007-08 2008-09 2009-10 2010-11 2011-12 2012-13
-10
-20
Air India
-30 Spice Jet
Jet Airways
-40
-50
-60
-70
Table 5.4 reveals that the operating profit ratio of public company, Air India showed
fluctuating trend. It was highest in 2012-13 (-23.75%) and lowest in 2008-09
(-33.62%). Its average profit was -28.14%. The operating ratio of private company,
Spice Jet reflects fluctuating trend during the study period i.e. from 2007-08 to
2012-13. It was highest in 2010-11 (3.55%) and lowest in 2007-08 (-57.76%). Its
average profit was -15.57%. Jet Airways also showed a fluctuating trend. It ranged
from 5.99% (2010-11) to -10.26% (2008 -09). Its average ratio was -2.08%. Its
average operating profit ratio of private companies was -8.83%.
Comparing the combined average operating profit ratio of both public and private
airline companies it is analyzed that the operating profit ratio of both the companies
are in negative but private companies (-8.83%) are better than the public company
(-28.14%). With the application of coefficient of variance it is found that there is
drastic difference between companies. Air India is much stable company with a
-13.15 percent C.V. and Jet Airways is the most unstable company, with a -285.10
percent C.V. in managing its operating profit.
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Table 5.5
Table Showing Results of Independent Samples Test for Operating
Profit Ratio
Levene's
Test for
Equality
of
95%
Std. Confidence
(2- Differen Differ Difference
F Sig. T df tailed) ce ence Lower Upper
Equal
variances 5.28 .044 -3.327 10 .008 -19.307 5.803 -32.239 -6.375
assumed
Equal
variances
-3.327 5.72 .017 -19.307 5.803 -33.677 -4.937
not
assumed
Conclusion:
The significant value of Levene‟s test 0.044 is less than 0.050. We assumed that
variances are not equal. An unequal variance t-test þ value 0.017 is not more than
0.05, so we reject the H0. We conclude that there is significant difference between
operating profit ratio of selected companies with mean (Public = 28.135 & Private =
8.827) and std. deviation (Public =3.698, Private = 13.727).
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Table 5.6
Table Showing Results of One Way ANOVA for Operating Profit
Ratio
Sum of
Squares Df Mean Square F Sig.
Between Groups 2036.924 2 1018.462
Within Groups 2892.540 15 192.836 5.281 .018
Total 4929.464 17
Tukey HSD
95% Confidence
Interval
Mean
Air India Spice Jet -12.56333 8.01740 .290 -33.3883 8.2616
Jet
-26.05167* 8.01740 .014 -46.8766 -5.2267
Airways
Spice Jet Air India 12.56333 8.01740 .290 -8.2616 33.3883
Jet
-13.48833 8.01740 .244 -34.3133 7.3366
Airways
Jet Air India 26.05167* 8.01740 .014 5.2267 46.8766
Airways
Spice Jet 13.48833 8.01740 .244 -7.3366 34.3133
*. The mean difference is significant at the 0.05 level.
Tukey HSDa
Company N 1 2
Air India 6 -28.1350
Spice Jet 6 -15.5717 -15.5717
Jet Airways 6 -2.0833
Sig. .290 .244
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Conclusion:
Since the significant þ value of one way ANOVA 0.018 ˂ 0.05 @ α 0.05, df (2, 15).
We reject the null hypothesis and conclude that there is significantly difference
between operating profit ratio selected aviation companies. The Tukey post hoc test
indicates that operating profit ratio is differ between Jet Airways and Air India.
5.9(iii) Net Profit Ratio
This ratio is very fruitful to the investor and the owner of the enterprise as it
reveals the overall profitability of the business concern. Net profit is the profit that
arrived after making all the adjustment or revenue and expenses, including non-
operating and abnormal item. This ratio is very helpful when comparing companies in
similar industries. The higher profit margin indicates a more profitable company.
High profit margin also indicates that the company has better control over its costs as
compared to its competitors. “Net profit ratio establishes a relationship between net
profit and sales indicates management‟s efficiency in manufacturing, administering
and selling the products. This ratio also indicates the enterprise capacity to withstand
adverse economic conditions.”9
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This ratio helps in determining the efficiency with which affairs of the business
are being managed. High net profit ratio means satisfactory returns to the owners. A
low net profit ratio would only indicate inadequate returns to the owners. The higher
the net profit is the more effective the company is at converting revenue into actual
profit.
The net profit ratio is determined by dividing the net profit by net sales.
Net Profit
Net Profit Ratio = x 100
Net Sales
Table 5.7
Net Profit Ratio of Public and Private Airline companies
(From 2007-08 to 2012-13)
(Percentage)
2007-08 -16.32 -49.00 -2.87
2008-09 -41.15 -20.87 -3.51
2009-10 -42.36 2.82 -4.51
2010-11 -49.13 3.51 0.08
2011-12 -51.51 -15.36 8.34
2012-13 34.25 -3.41 -4.15
Mean -27.70 -13.72 -1.10
G. Mean -27.70 -7.41
S.D. 32.83 19.88 4.91
Comb. S.D. 32.83 15.79
C.V. -118.52 -144.90 -446.36
Comb. C.V. -118.52 -295.63

137
Figure 5.3
Net Profit Ratio of Public and Private Airline Companies
40
30
20
10
0 Air India
2007-08 2008-09 2009-10 2010-11 2011-12 2012-13
-10 Spice Jet
-20 Jet Airways
-30
-40
-50
-60
Table 5.7 demonstrates that the net profit ratio of public company (Air India) and
private companies (Spice Jet, Jet Airways). Public company, Air India showed a
decreasing trend in the initial five years of study period i.e. from 2007-08 to 2011-12
and in the last year it showed major increase. It ranges from 34.25% (2012-13) to
-51.51% (2011-12). Its average ratio was -27.70%. The private company, Spice Jet
exhibited an increasing trend in the initial four year of study period i.e. from 2007-08
to 2010-11, it showed decrease in the year 2011-12 and again it showed a slight
increase in the year 2012-13. It was highest in 2010-11 (3.51%) and lowest in 2007-
08 (-49%). Its average ratio was -13.72%. Jet Airways showed fluctuating trend. It
was highest in 2011-12 (8.34%) and lowest in 2009-10 (-4.51%). Its average ratio was
-1.10%. The combined average net profit ratio of private companies was -7.41%.
Comparing the grand mean of public and private companies it is analysed that the
grand mean of private companies (-7.41%) is higher than the public company
(-27.70%). From the above table it is clear that the operating and non operating
expenses are high in public company. These expenses were not well managed by the
company and indicate that inefficient management of affairs of company. With
application of coefficient of variance it is found that the variation in net profit ratio of
Air India is less in comparison to Spice Jet and Jet Airways.
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Table 5.8
Table Showing Results of Independent Samples Test for Net Profit
Ratio
Levene's
Test for
Equality of
95%
Std. Confidence
(2- Differe Differ Difference
F Sig. T df tailed) nce ence Lower Upper
Equal
variances 4.249 0.066 -1.446 10 .179 -20.292 14.037 -51.569 10.984
assumed
Equal
variances
-1.446 5.96 0.199 -20.292 14.037 -54.696 14.111
not
assumed
Conclusion:
The significant þ value of Levene‟s test 0.066 is more than α value 0.050. We
assumed that the variances are equal. An equal variance t-test þ value 0.179 is greater
than 0.05; so we fail to reject null hypothesis. There is no significant difference
between net profit ratio of selected companies.
Table 5.9
Table Showing Results of One Way ANOVA for Net Profit Ratio
Between Groups 2356.260 2 1178.130
Within Groups 8339.730 15 555.982 2.119 .155
Total 10695.990 17
139
Tukey HSD
95% Confidence
Mean Interval
Air India Spice Jet -20.94167 13.61350 .302 -56.3023 14.4190
Jet
-26.60000 13.61350 .158 -61.9607 8.7607
Airways
Spice Jet Air India 20.94167 13.61350 .302 -14.4190 56.3023
Jet
-5.65833 13.61350 .910 -41.0190 29.7023
Airways
Jet Air India 26.60000 13.61350 .158 -8.7607 61.9607
Airways Spice Jet 5.65833 13.61350 .910 -29.7023 41.0190
Tukey HSDa
Company N 1
Spice Jet 6 -6.7617
Sig. .158

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Conclusion:
Since the significant þ value of one way ANOVA 0.155 is more than 0.05. We fail to
reject the H0 and conclude that there is no significant difference between net profit
ratio of selected aviation companies.
5.9(iv) Return on Capital Employed
The overall objective of a business is to earn a satisfactory return on the funds

invested in it while maintaining a sound financial plan. The return on total capital
employed indicates the economic productivity of capital. “Return on total capital
employed is an important yardstick of performance for equity shareholders since it
indicates the return of the funds employed by them.”10
Return on capital employed is calculated as profit before interest, tax and divided
by the difference between total assets and current liabilities. It is also considered as a
best measure of profitability in order to assess the overall performance of the
business. The term capital employed refers to the long-term funds supplied by the
creditors and owners of the firm. It is equal to long-term liabilities plus owner‟s
equity.
141
The main aim of a firm is to earn profit. Return on capital employed is used to see
the value of the business gains from its assets and liabilities. According to Pizzey,
“ROCE employed as a measure for comparison, compares operating profit to capital
employed and acts as common denominator between firms when comparing the
efficiency of managements in using available resources.” 11
Return on capital employed is calculated by dividing the net before interest, tax
and dividend by net capital employed. It can be expressed by this formula, the ratio is:
Net Profit before interest, tax and dividend

Return on Capital Employed= x 100
Capital Employed
Table 5.10
Return on Capital Employed of Public and Private Airline companies
(From 2007-08 to 2012-13)
(Percentage)
2007-08 -11.27 -108.67 0.48
2008-09 -19.26 -540.94 -4.60
2009-10 -10.22 88.19 2.75
2010-11 -12.62 34.26 5.61
2011-12 -39.05 -92.76 -3.37
2012-13 -30.86 -5.62 7.51
Mean -20.55 -104.26 1.40
G. Mean -20.55 -51.43
S.D. 11.88 226.63 4.83
Comb. S.D. 11.88 188.47
C.V. -57.81 -217.37 345

Source: Annual Reports of the Public and Private Airline Companies under study.
142
Figure 5.4
Return on Capital Employed of Public and Private Airline companies
200
100
0
2007-08 2008-09 2009-10 2010-1 2011-12 2012-13
-100 Air India
-200 Spice Jet
-300 Jet Airways
-400
-500
-600
Table 5.10 reveals that the return on capital employed ratio. Air India registered a
fluctuating trend. It was highest in 2009-10 (-10.22%) and lowest in 2011-12
(-39.05%). Its average ratio was -20.55%. The private company Spice Jet showed a
fluctuating trend. It was highest in 2009-10 (88.19%) and lowest in 2008-09
(-540.94%). Its average ratio was -104.26%. Jet Airways also exhibited a fluctuating
trend. It ranged from 7.51% (2012-13) to -4.60% (2008-09). Its average ratio was
1.40%. The combined average ratio of private companies was -51.43%.
By comparing the grand means of return on capital employed ratio of public and
private airline companies, it is examined that the return on capital employed ratio of
public company (-20.55%) is higher than the private companies (-51.43%). This
indicates that the public company is comparatively more efficient in using funds
entrusted to them and therefore it can be stated that the economic condition of the
public company was comparatively much better. Public company was making optimal
utilisation of the assets of the company. It was using long term fund of owners and
lenders most efficiently. By comparing the co-efficient of variance it is found that
there is drastic difference between companies. Air India is stable company than Spice
Jet and Jet Airways.
143
Table 5.11
Table Showing Results of Independent Sample Test for Return on
Capital Employed Ratio
Levene's
Test for
Equality of
Std. 95% Confidence
(2- Differ Differ Difference
F Sig. T df tailed) ence ence Lower Upper
Equal
variances 3.856 0.078 0.654 10 0.528 30.883 47.237 -74.368 136.135
assumed
Equal
variances
0.654 5.10 0.542 30.883 47.237 -89.786 151.552
not
assumed
Conclusion:
The significant value of Levene‟s test 0.078 is not less than 0.050. We assumed that
variances are equal. An equal variance t-test þ value 0.528˃ 0.05, we fail to reject null
hypothesis. There is no statistically significant difference between return on capital
employed of selected companies with mean (Public = 20.546, Private = 51.430) and
standard deviation (Public =11.882, Private = 115.096).
144
Table 5.12
Table Showing Results of One Way ANOVA for Return on
Capital Employed Ratio
Between Groups 37303.002 2 18651.501
Within Groups 257618.163 15 17174.544 1.086 .363
Total 294921.165 17
Tukey HSD
95% Confidence
Mean Interval
Jet
-21.94333 75.66273 .955 -218.4750 174.5883
Airways
Jet
-105.65333 75.66273 .368 -302.1850 90.8783
Airways
Jet Airways Air India 21.94333 75.66273 .955 -174.5883 218.4750
Spice Jet 105.65333 75.66273 .368 -90.8783 302.1850
Tukey HSDa
Company N 1
Spice Jet 6 -104.2567
Sig. .368
145
Conclusion:
Since the significant þ value of one way ANOVA 0.363 ˃ 0.05 @ α 0.05, df (2, 15).
We fail to reject the null hypothesis and conclude that there is no statistically
significant difference between return on capital employed of selected aviation
companies.
5.9(v) Return on Proprietors Fund

This ratio indicates the fruitful utilization of owner‟s fund. The thing which
motivates shareholders to invest in a company is the expectations of satisfactory rate
of return funds and they also evaluate the rate of return to decide whether to continue
their investment or not. Return on shareholders‟ fund measures the rate of return on
the shareholders equity. It measures the firm‟s efficiency. Return on shareholders‟
fund shows how a company uses investment funds to generate revenue.
It is computed as the net profit after tax dividing by the total of shareholder‟s
fund. Shareholders fund include equity share capital, preference share capital, reserve
and surplus and fictitious assets is deducted from it.
The ratio is expressed by the formula give below:-
Net profit after tax

Return on proprietors funds= x 100
Share holders fund
146
Table 5.13
Return on Proprietors Fund of Public and Private Airline companies
(From 2007-08 to 2012-13)
(Percentage)
2007-08 -48.13 -2268.08 -5.56
2008-09 195.24 82.10 -12.74
2009-10 75.71 -17.96 -17.70
2010-11 52.88 31.50 0.37
2011-12 39.20 395.78 -93.52
2012-13 -34.45 85.14 203.95
Mean 46.74 -281.92 12.47
G. Mean 46.74 -134.73
S.D. 87.84 983.79 99.92
Comb. S.D. 87.84 714.55
C.V. 187.93 -348.96 801.28
Source: Annual Reports of the Public and Private Airline Companies under study.
Figure 5.5
Return on Proprietors Fund of Public and Private Airline Companies
100%
80%
60%
40%
20% Jet Airways

0% Spice Jet
2007-08 2008-09 2009-10 2010-11 2011-12 2012-13
-20% Air India
-40%
-60%
-80%
-100%
Table 5.13 discloses the return on proprietor‟s fund of public and private airline
companies. The return on proprietor‟s fund ratio of public company, Air India showed
147
an increasing trend in the initial two year and then it showed a decreasing trend. It
was highest in 2008-09 (195.24%) and lowest in 2007-08 (-48.13%). The average
return on proprietor‟s fund ratio was 46.74%. The private company, Spice Jet displays
the fluctuating trend. It ranges from 395.78% (2011-12) to -2268.08 (2007-08). Its
average ratio was -281.92%. Jet Airways showed the fluctuating trend. It ranges from
203.95% (2012-13) to -93.52% (2011-12). Its average ratio was 12.47%. The
combined grand mean of private companies was -134.73%.
Comparing the grand mean of public and private airlines, it is examined that the
mean of public airline company (46.74%) is higher than private companies
(-134.73%). It indicates that in public company the owner‟s funds were effectively
deployed by the companies, the returns to the owner‟s were good and the profit of
such companies was also good. With the comparison of variance it is observed that
the variance in Air India is least than Spice Jet and Jet Airways. It is concluded that
the Air India is better than Spice Jet and Jet Airways.
Table 5.14
Proprietor’s Fund Ratio
Levene's
Test for
Equality of
Std. 95% Confidence
(2- Differen Differen Difference
F Sig. T df tailed) ce ce Lower Upper
Equal
variances
3.88 0.077 0.88 10 0.398 181.468 205.551 -276.528 639.464
assumed
Equal
variances
not 0.88 5.31 0.415 181.468 205.551 -337.674 700.611
assumed
148
Conclusion:
The significant þ value of Levene‟s test for equality of variance 0.077 is more than α
value 0.050. We assumed that variances are equal. An equal variance t-test þ value
0.398˃ 0.05, we fail to reject the null hypothesis. There is no significant difference
between return on proprietor‟s fund of selected companies.
Table 5.15
Table Showing Results of One Way ANOVA for Return on
Proprietor’s Fund Ratio
Sum of Squares Df Mean Square F Sig.
Between Groups 391713.553 2 195856.776
Within Groups 4927753.347 15 328516.890 .596 .563
Total 5319466.900 17
Tukey HSD
95% Confidence
Mean Interval
Jet
34.27500 330.91635 .994 -825.2704 893.8204
Airways
Jet
-294.38667 330.91635 .655 -1153.9320 565.1587
Airways
Jet Air India -34.27500 330.91635 .994 -893.8204 825.2704
149
Tukey HSDa
Company N 1
Spice Jet 6 -281.9200
Air India 6 46.7417
Sig. .592
Conclusion:
Since the significant þ value of one way ANOVA 0.563 is more than 0.05 @ α 0.05,
df (2, 15). We fail to reject the null hypothesis and conclude that there is no
significantly difference between return on proprietor‟s fund of selected aviation
companies.
5.9(vi) Return on Total Assets
The return on assets is a helpful measure of the profitability of the monetary

resource invested in the company‟s assets. This ratio indicates that how efficiently a
firm is using its assets to generate income before obligation should be paid.
150
Return on assets shows the income generated from invested capital. Return on
assets gives an idea as to how efficient administration is using its assets to generate
earnings. The assets of a company are included both debt and equity. Debt and equity
are used to fund the operations of an organization. The formula for return on assets
is:-
Earnings
Return on Total Assets = x 100
Total Assets
The term earnings include the net profit after tax but before interest. Total assets
include all net fixed assets, current assets and non-trading investments. Fictitious
assets are excluded but intangible assets are excluded only when they have no
realizable value. The higher the ratio, the better is the profit earning capacity of the
firm or vice versa.
Table 5.16
Return on Total Assets of Public and Private Airline companies
(From 2007-08 to 2012-13)
(Percentage)

2007-08 -5.40 -45.61 1.16
2008-09 -11.31 -44.83 1.46
2009-10 -8.26 7.56 2.59
2010-11 -9.36 10.13 5.02
2011-12 -9.83 -28.09 -1.26
2012-13 11.67 -2.45 2.24
Mean -5.42 -17.22 1.87
G. Mean -5.42 -7.68
S.D. 8.60 25.56 2.05
Comb. S.D. 8.60 20.49
C.V. -158.67 -148.43 -109.63

151
Figure 5.6
Return on Total Assets of Public and Private Airline Companies
20
10
-10 Air India

Spice Jet
-20 Jet Airways
-30
-40
-50
Table 5.16 displays the return on total assets of public and private airline companies.
Public company, Air India showed a fluctuating trend. It ranges from 11.67%
(2012-13) to -11.31% (2008-09). Its average ratio was -5.42%. Private company,
Spice Jet showed fluctuating trend. It was highest in 2010-11 (10.13%) and lowest in
2007-08 (-45.61%). The average ratio was -17.22%. Jet Airways exhibited a rising
trend till 2010-11 and in 2011-12 it showed a slight decrease and again it increased in
2012-13. It ranges from 5.02% (2010 -11) to -1.26% (2011-12). Its average ratio was
1.87%. The combined average return on total assets ratio of private companies was
(-7.68%).
By comparing the average mean of public and private airline companies it is

analysed that the ratio of both the companies in negative. But still the return on total
assets ratio of public company is higher than the private companies. It can be said that
public company using their assets properly and efficiently and it is more profitable
company than private companies. Private companies should increase the net profit and
should use the assets properly. With the comparison of co-efficient of variation
between companies it can be stated that Jet Airways is less variant than Air India and
Spice Jet with respect to return on total assets ratio.
152
Table 5.17
Total Assets Ratio
Levene's
Test for
Equality of
95%
Std. Confidence
(2- Differ Differe Difference
F Sig. t Df tailed) ence nce Lower Upper
Equal
variances 4.715 0.055 0.346 10 0.737 2.2583 6.529 -12.291 16.807
assumed
Equal
variances
0.346 8.489 0.738 2.2583 6.529 -12.650 17.166
not
assumed
Conclusion:
The significant value of Levene‟s test 0.055 is more than α level value 0.050. We
assumed variances are equal. An equal variance t-test þ value 0.737 is more than 0.05;
we fail to reject the H0. We conclude that there is no significant difference between
return on total assets of selected companies.
153
Table 5.18
Table Showing Results of One Way ANOVA for Return on Total
Assets Ratio
Sum of Squares Df Mean Square F Sig.
Between Groups 812.934 2 406.467
Within Groups 3958.640 15 263.909 1.540 .246
Total 4771.575 17
Tukey HSD
95% Confidence
Mean Interval

Jet
-4.04000 9.37922 .903 -28.4022 20.3222
Airways
Jet
-15.84000 9.37922 .242 -40.2022 8.5222
Airways
Jet Air India 4.04000 9.37922 .903 -20.3222 28.4022

Tukey HSDa
Company N 1
Spice Jet 6 -17.2150
Air India 6 -5.4150
Sig. .242
154
Conclusion:
Since the significant þ value of one way ANOVA 0.246 ˃ 0.05 @ α 0.05, df (2, 15).
We fail to reject the null hypothesis and conclude that there is no significant
difference between return on total assets ratio of selected aviation companies.
155
REFERENCES
1. Pandey I.M. (2001), Financial Management, Vikas Publishing House Pvt. Ltd.,
New Delhi, p. 130
2. Gibson Charles H. and Boyer patriciya A. (1979), Financial Statement Analysis,
CBI Publishing Co. Inc., Boston, p. 189
3. Duck R.E.V. and Jorvis F.R.J.(1999), Management Accounting, George G. Harrap
& Company Ltd., New York, p. 98
4. Chakraborty H. (2001), Management Accountancy, Nababharat Publishers,
Kolkata, p. 585
5. F.P. Langley (1978), Introduction to Accounting for Business, Butter Worths,
London, p. 21.
6. Weston J.F. and Brigham E.F. (1968), “Essentials of Management Finance” New
York: Holt, Rinehart and Winston, Inc., p. 47
7. Guthman H.B.(1976), Analysis of Financial Statement, Prentic Hall of India Pvt.
Ltd., New Delhi, p. 22
8. Kenedy Ralph D. & M. Stewan (1978), Financial statement, Richard D Irwin Inc.,
Homewood, p. 404
9. Pandey I.M, op. Cit., p. 132
10. Kishore Ravi M. (2005), “Cost Accounting and Financial Management” Taxman
Allied Service Pvt. Ltd., New Delhi, p. 534
11. Pizzey Alan (2001), Accounting and Finance: A Firm Foundation, Continuum
books, London, p. 241.
156

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Profitability Analysis

According to Chakraborty, “The terms profitability and profits are used

5.2 Importance of Profit

Profit is an important guideline of business activities for best utilisation of

5.3Relationship between Profit and Growth

There is a clear relationship between profit and growth of an enterprise. Growth is

In view of forgoing quotations it is very much clear that various renowned

Profitability is a source to determine the operational efficiency of a business. It is

According to different analysis profitability can be measured in different ways

(i) Profitability regarding management

Profitability is a standard for the performance of an enterprise and it indicates

“Profitability is the net result of a large number of policies and decision.”6

The term „profitability‟ should be distinguished from „profit‟. Profit refers to

Profitability is analysed with reference to operations of business, keeping in mind,

Profitability measurement is important for different categories of people with

Profitability is an important factor for all concerned with a particular business

5.6Relationship between Profitability and Operational Efficiency

The profitability is directly related with operational efficiency of an enterprise.

Operational efficiency is related to the profitability which is the percentage of

Management should decide and implement various measures to attain maximum

indicators of business activity and to analyze, evaluate and interpret in right

Profitability analysis is external because it helps the external users of accounting

The profitability of an undertaking may be measured by means of different

There are two types of profitability ratios:-

(i) Profits in relation to sales

(ii) Profits in relation to Assets

Profitability ratios are designed to calculate the operating efficiency of business.

5.9Application of Profitability Ratios

The following hypothesis has been formulated:

H0 (3): There is no significant difference between Profitability Position of Airline

H1 (3): There is a significant difference between Profitability Position of Airline

5.9(i) Operating Ratio

Operating ratio is computed by dividing the operating cost by sales. As a formula

S.D. 3.70 23.01 5.93

250 Air India

200 Jet Airways

difference between operating ratio of selected companies with mean

Between Groups 2036.924 2 1018.462

Within Groups 2892.540 15 192.836 5.281 .018

Jet Airways 26.05167* 8.01740 .014 5.2267 46.8766

Spice Jet Air India -12.56333 8.01740 .290 -33.3883 8.2616

Jet Airways 13.48833 8.01740 .244 -7.3366 34.3133

Jet Air India -26.05167* 8.01740 .014 -46.8766 -5.2267

*. The mean difference is significant at the 0.05 level.

Spice Jet 6 115.5717 115.5717

Air India 6 128.1350

5.9(ii) Operating Profit Ratio

Operating profit is calculated by subtracting all direct and indirect expenses

Air India Spice Jet Jet Airways

2007-08 -30.91 -57.76 -5.96

2008-09 -33.62 -22.47 -10.26

2009-10 -26.49 3.44 2.09

2010-11 -28.78 3.55 5.99

2011-12 -25.26 -14.20 -4.57

2012-13 -23.75 -5.99 0.21

Mean -28.14 -15.57 -2.08

G. Mean -28.14 -8.83

S.D. 3.70 23.01 5.93

Comb. S.D. 3.70 62.72

C.V. -13.15 -147.78 -285.10

G. Mean = Grand mean, SD= Standard Deviation, CV= Coefficient of variance.

8.827) and std. deviation (Public =3.698, Private = 13.727).

5.9(iii) Net Profit Ratio