There are several arguments in favour of corporate social responsibility. One view held by critics of the corporate world, is that since large firms create many social problems, they should attempt to address and solve them (Robbins & Colter, 2007). They went further to suggest that firms can do a better job of producing quality, safe products, and in conducting their operations in an open and honest manner. Robbins and Colter (2007) also says that the "self- interest" argument that suggests firms should conduct themselves in such a way in the present as to assure themselves of a favorable operating environment in the future. In this theory of the firm-based model, managers conduct a cost/benefit analysis to determine the level of resources to devote to CSR activities/attributes. Simply put, firms simultaneously assess the demand for CSR and the cost of satisfying this demand and then determine the optimal level of CSR to provide. Robbins and Colter (2007) explain that some suggestions that businesses should assume social responsibilities because they are among the few private entities that have the resources to do so. The corporate world has some of the brightest minds in the world, and it possesses tremendous financial resources.
2.2.2 Net Profit Margin
The net profit margin ratio is a profitability ratio. Essentially, it is the percentage of profit from business operations after deducting business operating expenses. Net profit margin is the percentage of revenue left after all expenses have been deducted from sales (turnover). The measurement reveals the amount of profit that a business can extract from its total revenue. Net profit margin is the ratio of net profits to revenues for a company or business segment. Typically expressed as a percentage, net profit margins show how much of each naira collected by a company as revenue translates into profit. The equation to calculate net profit margin is: net margin = net profit / revenue. Net profit margin indicates how well the company converts its sales into profits. It is both a measure of efficiency and of overall business health.
Companies that generate greater profit per naira of sales are more efficient. Companies with high net profit margin ratios are also better able to survive a product line that does not meet expectations or a period of economic contraction. Net Profit Margin Ratio is also a good time- series analysis measure, whereby business owners can look at company data across different time periods to see how the business is trending. A comparative analysis points to profit areas that have deteriorated or of increased cost trends that are reducing net profit. Financial ratios like the net profit margin ratio become most meaningful when they are viewed over time. The usefulness of the ratio, like all business data, has some limitations. Since industries are so different, the net profit margin is not very good at comparing companies in different industries. It is better at comparing similar businesses, not only ones in the same industry, but ones of similar size, or with similar product lines or doing business in the same broad geographic area.
2.2.3 Return on Total Assets
The return on total 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 total assets ratio or ROTA measures how efficiently a company can manage its assets to produce profits during a period.
Since company assets' sole purpose is to generate revenues and produce profits, this ratio helps both management and investors see how well the company can convert its investments in total assets into profits. ROTA is seen as a return on investment for the company since capital assets are often the biggest investment for most companies. In this case, the company invests money into capital assets and the return is measured in profits. Return on Total Assets (ROTA) is an indicator of how profitable a company is relative to its total assets. ROTA gives an idea as to how efficient management is at using its assets to generate earnings.
It is calculated by dividing a company's annual earnings by its total assets, ROTA is displayed as a percentage. The return on total assets (ROTA) ratio illustrates how well management is employing the company's total assets to make a profit. The higher the return, the more efficient management is in utilizing its asset base. The ROTA ratio is calculated by comparing net income to average total assets, and is expressed as a percentage. This ratio can also be represented as a product of the profit margin and the total asset turnover. Either formula can be used to calculate the return on total assets. When using the first formula, average total assets are usually used because asset totals can vary throughout the year. Simply add the beginning and ending assets together on the statement of financial position and divide by two to calculate the average assets for the year. The return on total assets ratio measures how effectively a company can earn a return on its investment in assets. In other words, ROTA shows how efficiently a company can convert the money used to purchase assets into net income or profits.
Since all assets are either funded by equity or debt, some investors try to disregard the costs of acquiring the assets in the return calculation by adding back interest expense in the formula. It only makes sense that a higher ratio is more favourable to investors because it shows that the company is more effectively managing its assets to produce greater amounts of net income. A positive ROTA ratio usually indicates an upward profit trend as well. ROTA is most useful for comparing companies in the same industry as different industries use assets differently.
2.2.4 Return on Equity
Return on equity (ROE) is a measure of profitability that calculates how many naira of profit a company generates with each naira of shareholders' equity. The formula for ROE is Net Income/Shareholders' Equity. ROE is sometimes called return on net worth. The return on equity ratio or ROE is a profitability ratio that measures the ability of a firm to generate profits from its shareholders investments in the company. In other words, the return on equity ratio shows how much profit each naira of common stockholders' equity generates. ROE is more than a measure of profit; it is a measure of efficiency. A rising ROE suggests that a company is increasing its ability to generate profit without needing as much capital. It also indicates how well a company's management is deploying the shareholders' capital.
In other words, the higher the ROE the better; falling ROE is usually a problem. However, it is important to note that if the value of the shareholders' equity goes down, ROE goes up. Thus, write-downs and share buybacks can artificially boost ROE. Likewise, a high level of debt can artificially boost ROE; after all, the more debt a company has, the less shareholders' equity it has (as a percentage of total assets), and the higher its ROE is. Banking industry tends to have higher returns on equity than others. As a result, comparisons of returns on equity are generally most meaningful among companies within the same industry, and the definition of a high or low ratio should be made within this context.
