Often many of us try to fight with the numbers that appear in either the newspapers or the annual reports of various companies. However, we are always dealing with the absolute numbers and hence, the analysis of that company on stand alone basis or comparison with its peers is not possible.
Let me take an example. Recently one of the newspapers carried this information about the performance of the top 10 companies of India and China last year in terms of sales and profits:
Let me take an example. Recently one of the newspapers carried this information about the performance of the top 10 companies of India and China last year in terms of sales and profits:
Sales ($ bn) Country Net Profit ($ bn)
288 China 40
128 India 10
If we have a look at the absolute numbers of the companies in both the countries, we will arrive at the conclusion that Chinese companies are more efficient. However, by saying this we will be ignoring the fact that Chinese companies are also having higher turnover (sales) which is contributing to their additional profits.
This is where ratios come to our rescue. In this case, if we find a relationship between the Net Profit and Sales, we can observe that Chinese companies are earning a return of 13.89% [(40/288)*100] on their sales whereas Indian companies are earning a return of 7.82% on their sales. So, we can interpret that Chinese companies are earning Rs. 13.89 on every Rs. 100 of sales while the corresponding figure for the Indian companies is only Rs. 7.82.
In other words, Chinese companies are incurring a cost of Rs. 86.11 (100-13.89) for Rs. 100 of sales whereas the corresponding figure for the Indian companies stands at Rs. 92.18. This cost has been incurred with respect to the purchase of raw material, manufacturing, wages and other operating costs. This also proves that Chinese companies are relatively cost efficient as compared to their Indian counterparts which has been substantiated by various reports mentioning about China’s emergence as an effective low cost destination for manufacturing and services.
We have been able to get this insight because of the use of these type of ratios which establish relationship between two absolute numbers so as to enable us to make meaningful analysis and comparison.
288 China 40
128 India 10
If we have a look at the absolute numbers of the companies in both the countries, we will arrive at the conclusion that Chinese companies are more efficient. However, by saying this we will be ignoring the fact that Chinese companies are also having higher turnover (sales) which is contributing to their additional profits.
This is where ratios come to our rescue. In this case, if we find a relationship between the Net Profit and Sales, we can observe that Chinese companies are earning a return of 13.89% [(40/288)*100] on their sales whereas Indian companies are earning a return of 7.82% on their sales. So, we can interpret that Chinese companies are earning Rs. 13.89 on every Rs. 100 of sales while the corresponding figure for the Indian companies is only Rs. 7.82.
In other words, Chinese companies are incurring a cost of Rs. 86.11 (100-13.89) for Rs. 100 of sales whereas the corresponding figure for the Indian companies stands at Rs. 92.18. This cost has been incurred with respect to the purchase of raw material, manufacturing, wages and other operating costs. This also proves that Chinese companies are relatively cost efficient as compared to their Indian counterparts which has been substantiated by various reports mentioning about China’s emergence as an effective low cost destination for manufacturing and services.
We have been able to get this insight because of the use of these type of ratios which establish relationship between two absolute numbers so as to enable us to make meaningful analysis and comparison.
No comments:
Post a Comment