What is profitability?
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Profitability is understood as the profitability of entrepreneurial activity or the activity of the enterprise as a whole, as well as its individual components: production and sale. When it comes to the profitability of an industry or business, it refers to the effectiveness of its functioning, profitability.
Instruction manual
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It is known that an important indicator of the enterprise is profit. But it does not provide an objective assessment of the business, does not allow comparing the work of several companies. Profitability index makes it possible to assess the effectiveness of the organization more accurately. When they talk about business profitability, they mean how profitable and attractive it is for investors.
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If the profitability of goods is estimated, then the ratio of the amount of profit received from sale to the costs of its production and sale is determined. When calculating the profitability of production as a whole, payback is determined, i.e. the ratio of profit to production costs. The latter include depreciation and repair of equipment, production facilities, remuneration of workers engaged in production, etc.
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Profitability ratios are generally calculated in aggregate. There are several types of profitability. All of them are grouped into three main groups: profitability of production, production and capital. The profitability of production as a whole is usually divided into general and estimated. The overall profitability of production is the ratio of profit to the average annual value of the assets of the enterprise. Estimated profitability is calculated by the ratio of profit minus obligatory payments, contributions to funds and payment of bank loans to the average annual value of assets.
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Product profitability is the ratio of profit to cost. It shows how much profit the company will receive for each unit of invested costs. Return on equity is the ratio of net profit to the total amount of advanced funds (equity or borrowed capital).
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Any company is interested in improving profitability. To this end, such measures as increasing production and marketing of products, increasing their quality, reducing costs, building an effective pricing system, introducing new industries and technologies, etc.
