Analysis of Profitability Ratios

Analysis of Profitability Ratios

From a high level analysis perspective, Massmart’s Gross Profit has remained constant over the 5 years, and this indicates that they are managing variable costs and prices well, however if we do a more in depth analysis we can see that the Gross Profit ratio dropped in 2009 as well as 2011. It was reported in the Massmart financial results in 2011 that the biggest contributing factor was due to the economic recession.

Focusing on 2010/2011’s increase in Gross Profit, Massmarts CFO said "This increase in the Group Gross Profit from 2010 to 2011 is due to higher gross margins in Mass Discounter, Makro and Massbuild and it's returning to the pre economic recessions levels. Higher margins in 2011 were achieved as the 3 abovementioned divisions gained market share to the detriment of independent competitors still battling the effects of the grudging economic recovery" .

EBIT figures have decreased significantly, especially in 2011 (2.9). This is an indication that expenses have increased. We can see this as the employee complement has increased from 24308 to 30495 people, which will contribute to the increase in salary expenses. This is supported by Massmart’s Annual Report 2011. It states that Massmart’s largest cost category is salaries:-"Employment costs are the groups single largest cost category at 49.1% of the total expenses". "The group employed 4.3% more employees compared to 2010, and this is increasing due to new stores being opened and from Acquisitions”

Massmart’s 2nd largest cost is attributed to rental costs (21.7% of the total expenses). They are growing their footprint and business so between 2010/2011 they opened up more distribution center’s which drove up leasing costs. Also, Makro opened (20) new stores around the country. Massmart say that "As Makro embarks on its aggressive store rollout- this ratio may