Company ratio analysis

In table 4.8, five ratios have been calculated for medium to large taxable companies (that
is, companies with total income equal to or greater than $10 million and with net tax/tax
payable greater than $0) with operating profit/loss greater than $0 (See box 4.6).

These ratios aim to provide insight into the operations of such companies and show
similarities or differences between industries. However, several factors that can influence
the level of these ratios should be noted.

• The ratios are averages across each industry and, as such, may be influenced by, and
tend to mask, the companies that have values at the extremes.

• The aggregate basis for calculating these ratios means that the ratios are subject to
distortions due to multiple counting of intra-group transactions. The current tax
system is based on legal entities (companies, and so on) but recognises that
companies may be parts of larger corporate groups. This means that:

° turnover reported in a consolidated set of accounts may be quite different from the
total turnover reported on the tax returns of constituent companies, and

° subsidiaries of large corporate groups with turnover of less than $10 million may
be omitted.

• The ratios may be affected by large corporate groups that have subsidiaries in a
number of industries and also have control over where profits are allocated within the
group.

• The ratios may be affected as much by corporate restructure as by true economic

effects.

• Varied legislative measures, industry structure and individual business operations can
also create differences in the values of these ratios.

Table 4.8: Financial ratios1 for profitable taxable medium to large companies2, by
broad industry, 2001–02 income year

Tax to
Industry3 Return on Net profit Gearing Interest profit ratio
assets margin cover ratio
Ratio
Ratio Ratio Ratio Ratio
0.21
Agriculture, forestry & 0.15 0.11 1.03 7.50
fishing
0.23
Mining 0.14 0.29 1.81 6.21
0.23
Manufacturing 0.11 0.08 1.39 6.74
0.11
Electricity, gas & water 0.08 0.21 1.19 3.04
supply
0.24
Construction 0.13 0.05 2.22 11.41
0.28
Wholesale trade 0.15 0.03 2.16 2.97
0.26
Retail trade 0.12 0.03 3.40 3.71

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 0.21
Accommodation, cafes & 0.10 0.11 1.11 14.27
restaurants
0.24
Transport & storage 0.08 0.06 2.06 5.81
0.29
Communication 0.15 0.19 1.72 6.46
0.13
Finance & insurance 0.07 2.14 4.89 1.93
0.20
Property & business 0.13 0.12 1.83 7.01
services
0.32
Education 0.30 0.15 2.02 56.64
0.25
Health & community 0.13 0.12 1.92 5.27
services
0.16
Cultural & recreational 0.08 0.26 1.94 5.96
services4
0.27
Personal & other services 0.10 0.08 1.39 5.22
1. Financial ratios are calculated from items in company tax detailed table 5 part A. Company tax detailed table 5,
parts B, C and D include financial ratios calculated for non-taxable and non-profitable companies. The ratios in
this table are aggregate ratios, that is, both the numerator and denominator used to calculate the ratios are
aggregate amounts for all companies in each industry. The ratios are not the average of the ratio for each
taxpayer in the industry.
2. The companies considered here are taxable companies with operating profit/loss amounts greater than $0 and
with total income equal to or greater than $10 million. Taxable companies are companies with net tax payable
(or tax payable) greater than $0.
3. The industry groups are classified based on the Australian and New Zealand Standard Industry Classification
(ANZSIC) system.
4. Includes sports.

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Box 4.6: Calculation of financial ratios1

In table 4.8 (and company tax detailed table 5, part A), the following ratios have been
calculated for companies with:

• total income equal to or greater than $10 million

• operating profit/loss greater than $0 (that is, the company is profitable), and

• net tax or tax payable greater than $0 (that is, they are taxable companies).

In company tax detailed table 5, parts B, C and D, similar ratios have been calculated for
companies with:

• total income equal to or greater than $10 million

• operating profit/loss equal to or less than $0 (that is, the company is non-profitable),
and/or

• net tax or tax payable equal to $0 (that is, they are non-taxable companies).

(See the description for company tax detailed table 5, parts A to D at the back of this
chapter.)

Return on assets: operating profit or loss, plus interest expenses, divided by total assets.
This measures the ordinary economic return that accrues to a business from its assets
(either by debt or equity). The effect of interest expenses is netted out from operating
profit so that the calculation focuses on the ordinary returns of the assets and ignores how
the assets are financed. Average asset levels vary across industries. Service-based
businesses generally have very low asset levels, while mining and manufacturing
operations are more heavily based around capital equipment. In the latter case there may
be a significant lag between expenditure and profit. This ratio depends on how the assets
themselves are valued.

Net profit margin: operating profit or loss, minus tax payable, divided by sales. It relates
after-tax profit to sales revenue. Profit margins vary across industries, with many large
retail operations having high-volume, low-margin business, whereas other industries may
operate with lower volumes and higher margins.

Gearing: total liabilities divided by shareholder funds. It reflects the borrowing position of
the company compared to its equity. In general, higher levels of gearing lead to higher
interest expense deductions and lower tax paid. In essence, some of the profit from the
geared company or group is transferred to the lending entities (profit allocation through
intra-group transactions).

Interest cover ratio: operating profit or loss, plus interest expenses, divided by interest
expenses. This ratio shows the proportion of operating profit required to cover the interest
expenses of the business. Higher borrowings lead to greater interest expenses and so the
ratio measures the capacity of a business to service the interest component of debt capital.

Tax to profit ratio: the tax payable, divided by the operating profit or loss. This ratio
shows the proportion of a company’s operating profit that is paid in tax. It is important to
note that there are numerous reconciliation items (capital gains, legislative concessions,
losses and the like) that are applied to operating profit before tax is calculated. The use of
these reconciliation items will affect the value of the ratio. Capital gains tend to increase
the ratio, whereas recouping prior year losses tends to decrease it.

5. This box presents only general descriptions of the above terms. It does not provide full technical or legal
definitions.

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