How to determine the level of profitability
Video: Ratio Analysis - Profitability 2024, July
When analyzing the effectiveness of the enterprise, one of the main places is profitability. It represents such a use of financial and material resources in which the company, when covering all costs, makes a profit.
Instruction manual
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When analyzing the profitability of the enterprise, a number of factors are calculated. The most important indicator here is the return on assets. It is defined as the profit remaining at the disposal of the company divided by the average cost of assets. By the level of this indicator, one can judge the profit that an enterprise receives from each ruble advanced in assets.
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Profitability of production, or profitability of production activity, is defined as the ratio of profit remaining at the disposal of the enterprise to the total cost of sales. Instead of net profit, when calculating this indicator, profit from sales of products can be used. Product profitability shows how much profit an organization receives from each ruble of costs invested in production and sales. This indicator can be calculated both for the enterprise as a whole, and for its individual units or types of products.
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Another indicator of profitability is the profitability of sales. It is calculated as the ratio of the organization’s profit from product sales to sales revenue. This indicator gives an idea of the share of profit in the amount of revenue from sales. Return on sales is also called the rate of return.
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The level of return on investment expresses the efficiency of using the funds that were invested in the development of this enterprise. This indicator is calculated as the ratio of profit before tax to the balance sheet minus short-term liabilities.
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Significant place in the analysis of profitability is the indicator of return on equity. It is defined as the profit remaining at the disposal of the enterprise divided by the amount of equity. If we compare this indicator with the level of return on assets, then we can conclude that the organization uses financial leverage (loans and borrowings) in order to increase profitability.
