Profitability Ratio

Profitability Ratio

Profitability ratio is related to profit. It shows the overall efficiency of the business concern. The earning capacity of a business is measured by profitability ratio. Efficient profit is not only necessary to cover the risk but also to exist in society for overall long period of time through expansion, growth & diversification of its business. Thus, earning is essential to monitor the financial health continuously.

   

           Generally higher value of profitability ratios shows better performance of the company and vice-versa. Some of the profitability ratios are discussed below:

2.1.2.1 Net Profit Margin

      It is the relationship between net profit and sales of the firms and measures the ability to turn each rupee of sales into net profit. The ratio provides considerable insight into overall efficiency of the business. A higher net profit margin indicates that management is efficient in its performance. In other words, it is the performance evaluation of the organization. It can be calculated by dividing the Net Profit after Tax by Operating Income.

                                               Net Profit after Tax (NPAT)

  Net Profit Margin =                       

                                                                   Operating Income

Where,

Operating Income = Interest Income+ Non Interest Income

Year	NPAT	Operating Income	Net Profit Margin
2061/62	57,386,634	664,572,690	8.64%
2062/63	117,001,973	799,669,489	14.63%
2063/64	254,908,844	945,773,232	26.95%
2064/65	247,770,758	1,092,977,045	22.67%
2065/66	316,373,495	1,653,366,746	19.14%
Average Ratio			18.40%

                                                                Source: Annual Report, Nepal SBI Bank Ltd

        Trend Diagram 4: Position of Net Profit Margin

 

 The above table and figure shows that the Net Profit Margin is in increasing trend from the year 2061/62 to 2063/64. But in the year 2064/65 and 2065/66, NPM has been decreased to 22.67% and 19.14% respectively. During this study period, the highest NPM was recorded in 2063/64 (26.95%) and the lowest in the year 2061/62 (8.64%). The average NPM for 5 years was 18.40% which reflects the overall efficiency of the business.