Profitability in Relation to Sales

Profitability

• In relation to Sales

• Gross profit margin

• CC’s gross profit margin had an increasing trend from 2000 to 2002, and reached peak at 2002 as 30.12%. Percent had a steady decline from 2002 (30.12%) to 2005 (26.47%). CC’s gross profit margin is less than the industry average (32%) even at its peak.
• Without an adequate gross profit margin, accompany cannot pay for its operating expenses. In general, a company's gross profit margin should be stable unless there have been changes to the company's business model. Therefore, we recommend CC to

• (1) Review its pricing strategy, because of possibly exists lower pricing products than industry average.
•  (2) Examine its COGS to avoid a high COGS lead to a lower gross profit margin.

• Operating Profit Margin

• Same as the gross profit margin, the operating margin went up from 2000 (4.38%) to 2002 (12.8%), and reached its highest point at 2002. After that the operating profit margin kept a decreasing trend from 2002 (12.8%) to 2005 (4.65%). Looks like CC do not have a good performance, because the average operating profit margin of industry is 14%.
• Operating profit margin is a good indicator of how well it is being managed and how risky it is. Highly variable operating margins are a prime indicator of business risk.

• Net profit margin

• CC’s net profit margin was 0.75% in 2000, reached its peak at 5.38%, in both 2002 and 2003, decreased after 2003. In 2005, CC had a 2.13% net profit margin.
• Net profit margin, or net margin, is equal to net income or profits divided by total revenue and represents how much profit each dollar of sales generates.

• (1) Advance its management efficiency.
• (2) Reduce its costs and expenses.

• In relation to investment

• Operating income return  on investment

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• CC’s ROI is 21.47% and 22.4% in 2002 and 2003 respectively. Since we do not have an industry average number of ROI, we don’ t know which position CC in.
• ROI is a performance measure, used to evaluate the efficiency of an investment or compare the efficiency of a number of different investments.

• Return on assets

• CC reached its highest point of ROA in 2002 (16.72%) and 2003 (17.26%), but in others years were all far more less than the industry average of 17.46%.
• The ROA figure gives investors an idea of how effective the company is in converting the money it invests into net income.

• (1) Re-evaluate its business strategy as its ROA is low.
• (2) Reducing Asset Costs, especially interest.

• Return on equity

• CC had a 63.77% and 41.08% of ROE respectively in 2002 and 2003, which were both more than the industry average percent of 38.25%. However, it did not have a decent performance in others years.
• ROE is the amount of net income returned as a percentage of shareholders ‘equity.  As ROE is a yardstick of profitability, most people like to see high numbers for it, usually 15% or better. The lower the return on equity, the more inefficient the company's operations are making use of those funds. So we recommend CC to

• (1) Improve asset turnover. For example, Computerize Inventory and Order Systems, increase sales, and improve efficiency.
• (2) Use more financial leverage.
• (3) Distribute idle cash efficiently.