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Case Study on Profitability - Assignment Example

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Case Study on Profitability

Thus the decrease in operating profit margin indicates that operating expenses of Deutsche Brauerei rise faster than its sales, which can be clearly seen from exhibit 1: 48.4% increase in sales against 49.5% increase in operating expenses. In turn this means Deutsche Brauerei now has less flexibility in determining prices, and therefore less safety in tough economic times.
The ratio of income taxes to earnings before taxes has also increased to 39.5% in 1999 and 39% in 2000 from 33.8% in 1997 and 34.5% in 1998. From exhibit 1 we can see that taxable income increase steadily over years (which can be explained by unstable economic situation in Ukraine), while earnings before taxes grow slower. Consequently return on sales, which shows the operational efficiency of the company dividing earnings before tax by total sales, has decreased from 4% in 1998 (before default) to 2.8% in 1999 leveling the breakdown to 3.2% in 2000. Still shareholders' equity continues to increase shifting the return on equity ratio up to 10.3% in 2000 - the highest measure for four years; the business looks good from this perspective. Return on net assets which is equal to net income divided by fixed assets and net working capital also shows signs of healthy performance increasing to 8.4% in 2000 6.9% in previous year. The return on assets ratio have returned to its value in 1998 - 4.7% - indicating that a company puts its assets to good use when restoring profitability after economic breakdown in former USSR region.
As can be seen from the exhibit 1, sales in Germany have been increasing slowly over the last four years, while the main stake was made on the Ukrainian market. Therefore changes in profitability of DB are greatly affected by local economic climate, which was very unstable these years. Although experiencing difficulties in generating profit, DB has made a successful recover from economic difficulties of the year 1998.

Leverage

Leverage ratios determine the company's long-term solvency. "Financial leverage is the name given to the impact on returns of a change in the extent to which the firm's assets are financed with borrowed money." (Scott, 1998) For instance debt/equity ratio shows how much money the company can safely borrow over long-terms and it is measured with dividing the total debt with total equity. The debt/equity ratio for DB has fallen from 72.3% in 1997 to 66% in 2000. The company has borrowed funds in 1997 making investments into Ukrainian market, which is the reason of such high debt/equity ratio in 1997. It is decreasing along with debt/total capital ratio (long-term debt/ long term-debt + shareholder's equity), which was 39.8% in 2000 comparing to 41.9% in 1997. This is a good sign of increasing long-term solvency. EBIT/interest ratio, which shows how many times the company can cover its obligations was rather stable during the last three years (4.7 in 1999, 2000, 4.8 in 1998) increasing significantly from 3.8 in 1997.
The company has significantly decreased its debt in 1998, which was reflected in the increased solvency in the last three years.

Asset Utilization

The efficiency of the business is measured by asset usage ratios. Asset utilization ratios are especially important for internal monitoring concerning performance over multiple periods, serving as warning signals or benchmarks from which meaningful conclusions may be reached on operational issues (Blok and Hirt, 2005). Asset turnover is one of the most important ...Show more

Summary

According to figures reported in exhibit 1 operating profit of Deutsche Brauerei has been increasing constantly for the last four years from 4,541,000 in 1997 to 6,106 in 2000. At the same time, operating profit margin has been decreasing from 7.3% in 1997 to 6.6% in 2000…
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