What is the profitability
Profitability – an objective measure, which reflects how the company effectively utilizes labor, material and cash resources in the production and sale of goods or services to end consumers. This indicator of economic efficiency of the enterprise is relative, it is expressed as a percentage. Profitability is defined as the result of the relation of the gross or net profit to the sum of all costs for the provision of goods or services.
By how high the profitability of the enterprise can judge how recouped its production costs, how effective its pricing and how it is able to control these costs. If to simplify its calculation, the profitability can be represented as the ratio of net profit to cost. The lower the cost, ceteris paribus, the higher the profitability.
This figure is much more than the profit characterises the economic activity of the company, because it is clear the ratio of the resulting economic effect of used resources. Ultimately, profitability depends on in what area of production is the business because different economic activities, it will be different due to objective reasons.
What should be the indicators of profitability
This issue is of concern not only businessmen, but also tax authorities, whose task is to monitor that companies should not understate display to report earnings and, thus, did not reduce the tax burden. So for several years, the Federal tax service makes the calculation of "regulatory" profitability for enterprises of all sectors of the economy.
In the tables presented on the site on specified return on sales and return on assets. The first indicator is the ratio of net profit (profit minus losses) and cost. The second is the ratio of net profit and assets. Latest calculations are according for 2012. According to them, the profit margin of the average Russian enterprises amounted to 9.7%, and its assets is 6.8%. With regard to economic activities, one of the most cost-effective remains mining, where profitability is 50%, and assets – 16%. The profitability of fishing, for example, is 21.4%; food, beverages and tobacco, was 11.1%; textile and garment production, or 12.3%.
Advice 2: What is the return on sales
Profitability is one of the indicators of business activity of the enterprise which are necessary for making management decisions. It is used in financial statement analysis, valuation of economic activity, the pricing process. The level of effectiveness of sales characterizes their profitability.
Profit margin shows what part of the revenue of the enterprise has profit, and it is their ratio:
Profit margin = Profit / Revenue x 100%.
Thus its calculation can be carried out by different types of profit: gross, operating, that is, from the main activity, and clean. Formula of computation as follows:
- Return on sales (gross profit = gross profit / Revenue x 100%;
- Operating margin = Profit from sales / Revenue x 100%;
- Net profit margin = Net profit / Revenue x 100%.
The profitability ratio net profit margin shows how much net profit the enterprise has from 1 rouble of sales, i.e. how much available funds remain available after funding for core activities, interest payments on loans, other expenses and taxes. The profitability ratio's gross profit margin characterizes the main activities of the company and to determine the share of costs in sales and trading margin.
Profitability of sales is calculated according to the profit and loss statement (forms No. 2 of the balance sheet) at the reporting date. For objective evaluation it is necessary to consider its dynamics, that is, for several periods. Based on the analysis of changes of the coefficient we can conclude about the effectiveness of business management: the growth of evidence of competent and correct decision of the leadership of the organization and the reduction of potential problems in operation.
The change in the coefficient of profitability of sales in one direction or another can be attributed to various factors: the increase in the absolute rate of profit, reduced sales, etc. it is Important to identify the reasons: the higher prices for the products and services may be normal or low value, but if it is associated with a decline in consumer demand and interest in the company's product, it is regarded as a disturbing factor.
On the background of the implementation of advanced technologies or the development of new activities often marked by a temporary reduction of profitability of sales. However, when correctly chosen strategy of development in the future, the investments will pay off, and profit margin may rise to previous levels, and to overcome it.