A STUDY ON VARIOUS DETERMINANTS OF PROFITS

USING REGRESSION ANALYSIS

T E A M - 1 0

Bharaneedharan T.M.R. 1511021

Hari Prasad M 1511032

Maheswaran Selvaraj 1511052

Meenu Nivethitha S 1511056

Monika M.S. 1511060

Muthukaruppan K 1511061

Rohini M 1511082

Introduction• Profit is a source of income for any business

• Profit is calculated by subtracting a company's total expenses from

total revenue, thus showing what the company has earned or lost in a

given period of time

• A business can only earn profit if it is managed efficiently

Importance of Profit• Survival

• Expansion and Growth

• Index for Success

• Motivation to Businessman

• Helps to Gain Reputation

Objective of the Study

The objective is to determine which ratio is the best determinant

of profit by using regression equation by considering 100 companies

Source of the Data• The data collected for the purpose is a secondary data

• Secondary Data is basically a kind of data that has been collected through

secondary sources

• It provides a basis for comparison for the data that is collected by the researcher

• The required data for the study is collected from Prowess

Data Collection

• The data required for the study is the profit of the companies

of various sectors and the financial ratios for those companies

• By using the financial ratios we determine the profit

determining factor for all the companies as a whole

• All the data required are collected in prowess

Prowess• Prowess is a database of the financial performance of nearly 27,422 companies

• It includes all companies traded on:

• National Stock Exchange

• Bombay Stock Exchange

• Unlisted public limited companies

• Hundreds of private limited companies.

• Prowess is an indispensable source to understand the performance of active

business enterprises in India.

Tools for Analysis

• The required determination is done using regression analysis

• The regression analysis is done with the help of the software SPSS

• The interpretation is done from the output arrived from SPSS

Regression Analysis

• Regression is a statistical technique to determine the linear

relationship between two or more variables

• In its simplest form, regression shows the relationship between one

independent variable (X) and a dependent variable (Y), as in the

formula below:

Y=a +bX

Multiple regression models• By multiple regression, we mean models with just one dependent and

two or more independent (exploratory) variables• The variable whose value is to be predicted is known as the dependent

variable• The ones whose known values are used for prediction are known

independent (exploratory) variables

• Y=a + β1X1 + β 2X2 + β 3X3

Independent Variables• Current Ratio

• Debt – Equity Ratio

• Inventory Turnover

• Return on Total Asset

• Asset Turnover

• Market Capitalisation

Current RatioThe current ratio is a liquidity ratio that measures a company's

ability to pay short-term and long-term obligations. The current ratio is an important measure of liquidity because short-term liabilities are due within the next year.

Current Ratio = Current Asset / Current Liability

Debt – Equity RatioThe debt-equity ratio is a leverage ratio that compares a

company's borrowed capital to its owned capital. This is a measurement of how much suppliers, lenders, creditors and obligors have committed to the company versus what the shareholders have committed.

Debt-Equity Ratio = Debt / Equity

Inventory Turnover RatioThe inventory turnover ratio is an efficiency ratio that shows how

effectively inventory is managed by comparing cost of goods sold with average inventory for a period. This measures how many times average inventory is "turned" or sold during a period.

Inventory Turnover Ratio = Cost of Goods sold / Average inventory

Return on Total AssetThe return on assets ratio, often called the return on total assets,

is a profitability ratio that measures the net income produced by total assets during a period by comparing net income to the average total assets. In other words, the return on assets ratio or ROA measures how efficiently a company can manage its assets to produce profits during a period.

Return on assets ratio = Net Income / Total Assets

Asset Turnover RatioThe asset turnover ratio is an efficiency ratio that measures a

company's ability to generate sales from its assets by comparing net sales with average total assets. In other words, this ratio shows how efficiently a company can use its assets to generate sales.

Asset Turnover Ratio = Net Sales / Total Assets

Market Capitalization RatioThe capitalization ratio measures the debt component of a

company's capital structure, or capitalization (i.e., the sum of long-term debt liabilities and shareholders' equity) to support a company's operations and growth.

Market capitalization ratio = Long term debt / Long term debt + Equity

Analysis and Interpretations• With the help of Prowess, we have collected different ratios like current ratio, Debt

equity ratio, Inventory turnover ratio, Return on total asset, Asset turnover ratio and

market capitalization ratio

• which are the determinant of profit for 100 companies

• we have collected the profit after tax for all the 100 companies

• All the data’s collected from the Prowess are entered in SPSS

• Since we need to know the determinant of profit

FindingsRatio• Current ratio• Debt to equity ratio• Inventory turnover ratio• Return on total asset ratio• Asset turnover ratio• Market capitalisation ratio

Significance0.5320.8170.9330.2420.3170.000

Recommendations• From our analysis, it is determined that in general, the inventory

turnover ratio has a great impact on profit and so the firm must concentrate on the turnover rate of inventory.

Limitations• The conclusions drawn from the ratios can be no better than the

standards against which they are compared• When the two companies are of substantially different size, age and

diversified products,, comparison between them will be more difficult• If companies resort to ‘window dressing’, outsiders cannot look into

the facts and affect the validity of comparison• Ratios do not provide a definite answer to financial problems• Thus, one must rely upon one’s own good sense in selecting and

evaluating the ratios

Conclusion• From our analysis, it is determined that in general, the inventory turnover ratio

has a great impact on profit and so the firm must concentrate on the turnover

rate of inventory

• each firm can concentrate individually on their determinant to maximize the

profit by knowing their factor which affects the profit

• The factor may vary from firm to firm so it is necessary for each firm to know

about their profit determinant

THANK YOU…