CASE STUDY

PROFITABILITY ANALYSIS OF
XYZ CORPORATION AND ABC
CORPORATION
By:
GRACEL JOY O. VICENTE
MBA 1A

INSTRUCTOR:
MS. CATHERINE C. VIESCA, CPA
BA 515 - FINANCIAL MANAGEMENT

MASTER IN BUSINESS ADMINISTRATION

SEPTEMBER 17, 2022

UNIVERSITY OF ANTIQUE
SIBALOM, ANTIQUE
 I. Statement of the Problem

Profitability ratios are used not only to evaluate the financial viability of your
business, but are essential in comparing your business to others in your industry.
This paper tries to compare the financial performance of two manufacturing
companies’ namely XYZ Corporation and ABC Corporation for the financial year
2021. XYZ Corporation is based in the Manila while Global automobiles are based
in the Iloilo City. Both the companies manufacture all type home appliances. We
will determine which company to invest in the view point of a potential investor
that will offer good return of investment. The main source of information for the
analysis are the financial statements of a business, which are the output of
accounting. I will also give my recommendations on what the companies should do
to improve on their financial performance based on my analysis.

I. Objective

The major objective of the study is to examine and compare the profitability
position of XYZ Corporation and ABC Corporation.

• To study the profitability position of XYZ Corporation and ABC

Corporation.
• To study the significance of profitability by selecting a few important
parameters such as Profit, Gross Margin, Return on total assets (ROA) and
Return on common stockholder’s equity (ROCE).
• To measure XYZ Corporation’s performance against ABC Corporation.
To determine which shows higher profitability result between two companies
and best company to invest.

II. Areas of Consideration

Ratio analysis is the analysis of financial information found in a

company's financial statements. Such analysis can shed light on financial aspects
that include risk, reward (profitability), solvency, and how well a company
operates. As a tool for investors, ratio analysis can simplify the process of
comparing the financial information of multiple companies but we will only focus
in profitability ratio of two companies.
Profitability ratios are financial metrics used by analysts and investors to
measure and evaluate the ability of a company to generate income (profit) relative
to revenue, balance sheet assets, operating costs, and shareholders’ equity during a
specific period of time. They show how well a company utilizes its assets to produce
profit and value to shareholders. The ratio seeks to establish the overall

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 effectiveness of management as far as returns generated on sales and investments
are concerned with the following;

a. Profit Margin Ration

b. Gross Margin Ratio
c. Return on Total Assets
d. Return on Common Stockholder’s Equity

The profit margin ratio, also called the return on sales ratio or gross profit
ratio, is a profitability ratio that measures the amount of net income earned with
each peso of sales generated by comparing the net income and net sales of a
company. In other words, the profit margin ratio shows what percentage of sales
are left over after all expenses are paid by the business.

The gross margin ratio, also known as the gross profit margin ratio, is
a profitability ratio that compares the gross margin of a company to its revenue. It
shows how much profit a company makes after paying off its Cost of Goods
Sold (COGS). The ratio indicates the percentage of each peso of revenue that the
company retains as gross profit.

The return on total assets ratio compares a company’s total assets with its
earnings after tax and interest. This profitability indicator helps you determine how
your company generates its earnings and how you compare to your competitors.

The return on common equity ratio measures how much money common
shareholders receive from a company compared with how much they invested
originally.

XYZ Corporation and ABC Corporation are competing companies based out
of Manila and Iloilo City, selling home appliance units. Both companies is within
the same industry but different location. The following financial statements and
profitability analyses represent the companies’ operations in year 2021 and are
presented to provide insight to potential investors.

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 1. XYZ Corporation

a) Financial Statements

XYZ Corporation
Balance Sheet
For Year Ended December 31, 2021

Assets
Current Assets
Cash ₱ 426.00
Accounts Receivable, net 98,406.00
Inventory 62,800.00
Total Current Assets ₱ 161,632.00
Plant Assets
Equipment and Buildings ₱ 430,000.00
Less: Accumulated depreciation - 19,000.00
Equipment and Buildings, net 411,000.00
Land 70,000.00
Total plant assets ₱ 481,000.00
Intangible Assets ₱ -
Total Assets ₱ 642,632.00
Liabilities
Current Liabilities
Accounts Payable ₱ 26,440.00
Interest Payable 6,650.00
Total current liabilities ₱ 33,090.00
Long-term Liabilities (net of current
portion)
Note Payable, 20 year, 7% ₱ 380,000.00
Total Liabilities ₱ 413,090.00
Equity
Common Stock ₱ 160,000.00
Retained Earnings 69,542.00
Total Equity ₱ 229,542.00
Total Liabilities and Equity ₱ 642,632.00

XYZ Corporation
Income Statement
For Year Ended December 31, 2021

Sale ₱ 398,500.00
Less: Sales Returns and Allowances ₱ 994.00
Net Sales 397,506.00
Cost of Goods Sold - 177,000.00
Gross Profit ₱ 220,506.00
Operating Expenses
Selling Expenses
Depreciation Expense-Store Equipment -₱ 9,000.00
Rent Expense-Leased Equipment - 16,000.00
Total Selling Expenses -₱ 25,000.00
General and Administrative Expenses
Depreciation Expense-Building -₱ 10,000.00
Total General and Administrative Expenses -₱ 10,000.00
Total Operating Expenses -₱ 35,000.00
Income from Operations ₱ 185,506.00
Other Revenue and Gains (Expenses and Losses)
Interest Expense -₱ 27,650.00
Other Operating Expenses - 34,200.00
Income Tax Expense - 30,914.00
Total other Revenue and Gains (Expenses and Losses) - 92,764.00
Net Income ₱ 92,742.00

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 XYZ Corporation
Statement of Cash Flows
For Year Ended December 31, 2021

Cash Flows from Operating Activities

Net Income ₱ 92,742.00
Adjustments to reconcile net income to net cash provided by operating activities
Income Statement items not affecting cash
Depreciation Expense 19,000.00
Changes in Current Assets and Current Receivables
Increase in Accounts Receivable - 99,400.00
Increase in Inventory - 62,800.00
Increase in Allowance for Bad Debts 994.00
Increase in Accounts Payable 26,440.00
Increase in Interest Payable 6,650.00
Net Cash Used by Operating Activities -₱ 16,374.00
Cash Flows from Investing Activities
Cash paid for purchase of equipment - 80,000.00
Cash paid for purchase of land - 70,000.00
Cash paid for purchase of building - 350,000.00
Net Cash Used by Investing Activities Cash Flows from Financing Activities -₱ 500,000.00
Cash received from issuing stock
160,000.00
Cash paid for dividends - 23,200.00
Cash received from note payable 400,000.00
Cash paid for principal of note payable - 20,000.00
Net Cash Provided by Financing Activities ₱ 516,800.00
Net Increase in Cash ₱ 426.00
Cash balance at prior year-end -
Cash balance at current year-end ₱ 426.00

XYZ Corporation
Statement of Retained Earnings
Statement of For Year Ended
Retained December 31, 20X1
Earnings
For Year Ended December 31, 2021

Retained Earnings (Prior Fiscal Year End) ₱ -

Plus: Net Income 92,742.00
92,742.00
Less: Cash Dividends - 23,200.00
Retained Earnings (Current Fiscal Year End) ₱ 69,542.00

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 b) Profitability Ratios

XYZ Corporation
Profitability Analysis
For Year Ended December 31, 2021

Profit Margin Ratio 23.33%

Gross Margin Ratio 55.47%
Return on Total Assets 14.43%
Return on Common Stockholders’ Equity 40.40%

2. ABC Corporation

a. Financial Statements

ABC Corporation
Balance Sheet
For Year Ended December 31, 2021

Assets
Current Assets
Cash ₱ 7,835.00
Accounts Receivable, net 94,430.00
Inventory 51,000.00
Total Current Assets ₱ 153,265.00
Plant Assets
Equipment and Buildings ₱ 522,000.00
Less: Accumulated depreciation - 41,500.00
Equipment and Buildings, net 80,500.00
Land 70,000.00
Total plant assets ₱ 550,500.00
Intangible Assets ₱ -
Total Assets ₱ 703,765.00
Liabilities
Current Liabilities
Accounts Payable ₱ 26,440.00
Interest Payable 6,650.00
Notes Payable 380,000.00
Total current liabilities ₱ 413,090.00
Long-term Liabilities (net of current
portion)
Note Payable 83,360.00
Total Liabilities ₱ 496,450.00
Equity
Common Stock ₱ 160,000.00
Retained Earnings 47,315.00
Total Equity ₱ 207,315.00
Total Liabilities and Equity ₱ 703,765.00

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 ABC Corporation
Statement of Cash Flows
For Year Ended December 31, 2021

Cash Flows from Operating Activities

Net Income ₱ 70,515.00
Adjustments to reconcile net income to net cash provided by operating activities
Income Statement items not affecting cash
Depreciation Expense 41,500.00
Changes in Current Assets and Current Receivables
Increase in Accounts Receivable - 99,400.00
Increase in Inventory - 51,000.00
Increase in Allowance for Bad Debts 4,970.00
Increase in Accounts Payable 26,440.00
Increase in Interest Payable 6,650.00
Net Cash Used by Operating Activities -₱ 325.00
Cash Flows from Investing Activities
Cash paid for purchase of equipment - 80,000.00
Cash paid for purchase of land - 70,000.00
Cash paid for purchase of building - 350,000.00
Net Cash Used by Investing Activities -₱ 500,000.00
Cash Flows from Financing Activities
Cash received from issuing stock 160,000.00
Cash paid for dividends - 23,200.00
Cash paid for principal of lease agreement - 8,640.00
Cash received from note payable 400,000.00
Cash paid for principal of note payable - 20,000.00
Net Cash Provided in Financing Activities ₱ 508,160.00
Net Increase in Cash ₱ 7,835.00
Cash balance at prior year-end -
Cash balance at current year-end ₱ 7,835.00

ABC Corporation
Statement of Retained Earnings
For Year Ended December 31, 2021

Retained Earnings (Prior Fiscal Year End) ₱ -

Plus: Net Income 70,515.00
70,515.00
Less: Cash Dividends - 23,200.00
Retained Earnings (Current Fiscal Year End) ₱ 47,315.00

b. Profitability Ratios

ABC Corporation
Profitability Analysis
For Year Ended December 31, 2021

Profit Margin Ratio 17.92%

Gross Margin Ratio 52.01%
Return on Total Assets 10.02%
Return on Common Stockholders’ Equity 34.01%

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III. Alternative Course of Action

A. Profit Margin Ratio

The analysis shows that XYZ Corporation was able to convert

23.33% sales into profits while ABC shows 17.92%, this is by
dividing Net Income by Net Sales (Net Sales/Net Income = Profit
Margin Ratio). XYZ has higher profit margin ratio by 5.41%,
therefore, as potential investor, we will choose XYZ Corporation to
invest in.

B. Gross Margin Ratio

XYZ Corporation has a higher gross margin by 3.46% than

ABC Corporation, which is computed by dividing Gross Profit by Net
Sales (Gross Profit/Net Sales = Gross Margin Ratio. This indicates
that XYZ make a reasonable profit on sales while ABC indicates that
the company is underpricing. Therefore, as potential investor we will
prefer XYZ Corporation.

C. Return on Total Assets

Every peso that XYZ’s invested in assets generated 14.43

cents of net income while ABC has 10.02 cents. ROE is computed by
dividing Net Income by Total Assets (Net Income/Total Assets =
Return on Total Assets). XYZ Corporation shows that the company
is efficiently using its assets to generate profits. Therefore, we will
choose XYZ Corporation to invest in.

D. Return on Common Stockholder’s Equity

Based on the analysis, XYZ Corporation has a higher return

on common stockholder’s equity by 6.39% than ABC. It is computed
by dividing the net income available for common stockholders by
common stockholders’ equity (Net Income/Average Common
Stockholder’s Equity). This indicates that XYZ has higher
profitability and stronger financial position and can convert its
potential investors into actual common stockholders. Therefore, in
investor position, we will choose XYZ Corporation.

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IV. Conclusion and Recommendation

Through this research we came to the conclusion that financial analysis

specifically the profitability analysis is very important for the potential investors.
The objective of the paper has been achieved by carefully analyzing the financial
statements of both companies.
Based on the financial statements, each company has its strengths and
weaknesses. ABC Corporation boasts a higher operating cash flow and cash
balance, which contributes to its liquidity. XYZ Corporation, however, possesses
the higher net income and retained earnings. In the profitability analysis, XYZ
Corporation fairs better overall than ABC Corporation, holding a higher profit
margin ratio, gross margin ratio, return on total assets, and return common
stockholders’ equity. From an investment standpoint, XYZ Corporation is the better
company to invest in because of its higher overall net income, retained earnings,
and profitability ratios.
Profitability represents final performance of company i.e. how profitable
company. It also represents how profitable owner’s funds have been utilized in the
company. The purpose of the profitability ratio analysis is providing the
information about the ability of business to generate profit. Although the above
given data shows that XYZ Corporation has better profitability result compares to
ABC Corporation, there are still ways on in order to improve the financial
performance of ABC Corporation or both companies.

The first thing you should think about if you are looking to increase
profitability is to think about better sales. It is not the easiest thing to achieve, but
with good monitoring, implementation, and the professionalization of a CRM, you
can achieve it. It requires 100% commitment, and working through clear goals,
which may well be with the SMART methodology (Specific, Measurable,
Attainable, Realistic and Timely).

There are also four key areas that can help drive profitability of ABC
Corporation. These are reducing costs, increasing turnover, increasing productivity,
and increasing efficiency. Company can also expand into new market sectors, or
develop new products or services. This guide explains how to assess your business'
profitability, deliver growth for your bottom line, and how to plan and manage
change.

Company must concentrate on their sales effort, expand their market, and
boost productivity while cutting expenses or waste of the business. There are
various strategies we can recommend in improving profitability of a business
depending on its size, industry and location. For others, the key to success is an
emphasis on building the right team of employees and striving to make gradual but
continuous improvements.

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 Profitability ratios offer the true picture of a company’s relative financial
condition and so, it implies the profitability of company by comparing the various
financial items that may be obtained from the company documents. If an investor
is interested in your company, they'll want to know they're making a good
investment. Being able to leverage ratios to show your company's profitability will
give investors far more confidence than simply showing them a sales revenue
statement.

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