Question 2
(I) Profitability Ratios
The profitability ratios are financial ratios that are used to assess a corporation’s performance and its ability to generate income from its operations as compared to its expenses and other costs during a specific period of time. In other words, these ratios basically shows how well a corporation is doing and how well can it achieve profits from all of its operations.
Most commonly used by investors and creditors, the profitability ratios can be used to judge a corporation’s performance against its previous business period or over another corporation which is a competitor. For most of these ratios, having a higher ratio value will indicate that the business is doing well.
Amongst the profitability ratios are ratios such as
a) Profit Margin
b) Gross Margin Ratio
c) Return on Assets
d) Return on Equity
e) Return on Capital Employed.
a) The most commonly used profitability ratio is the Profit Margin ratio, which is also known as the Return on Sales ratio or Gross Profit ratio. It is used to determine the amount of net income gained with each ringgit of sales generated by comparing the net income over the net sales of a business. In other words, the Profit Margin ratio shows how many percentages of sales are left after the expenses and other costs are paid by a business. Investors will use this ratio to find out if profits are high enough to distribute dividends while creditors will use this to observe whether a business has enough money to pay back its loans or not.

Formula
Profit Margin Ratio = Net Income/ Net Sales
The Profit Margin Ratio is calculated by dividing the net income by the net sales. Net income is gained after total expenses have been subtracted from total revenue while net sales is gained by excluding any return or refund from gross sales. A high ratio will show that a business is gaining