Profitability of an enterprise is an indicator of efficiency with which fixed assets are used, calculated as the ratio of profit to the average value of fixed and current assets.
Profit and profitability of the enterprise are directly interconnected.
Profit is an economic category that expresses industrial and economic relations arising from the formation and subsequent use of a manufactured product. In the real sector, profit takes a material form in the form of cash, resources, funds and benefits.
If the company makes any profit, then it is profitable. The profitability indicators used in the calculations reflect relative profitability. Analysis of the financial stability of the enterprise is based on the analysis of these indicators. To assess the effectiveness and economic feasibility of the functioning of the enterprise, absolute and relative indicators are taken.
Absolute indicators make it possible to analyze the dynamics of profit indicators for certain years. Moreover, to obtain more reliable results, indicators are calculated taking into account inflation.
Relative indicators are options for the ratio of profit and capital invested in production (profit and production costs). Therefore, they are not so affected by inflation.
The absolute amount of profit does not always give a correct idea of the level of profitability of a particular enterprise, since it is affected by both the quality of work and the scale of activity. In this regard, for a more accurate description of the operation of enterprises, they use not only the absolute amount of profit, but also a relative indicator, called the level of profitability.
These indicators should be considered in comparison with other time periods, since this allows us to judge the dynamics of the enterprise.
Profitability of an enterprise characterizes the level of profitability or loss-making of production. Profitability indicators themselves are relative characteristics of the results of financial growth and the effectiveness of the organization. They reflect the relative profitability of the firm or enterprise, which is measured as a percentage of the cost of capital from different perspectives.
The most important characteristics of the actual environment in which the profit and income of the enterprise is formed are profitability indicators. They are used in comparative analysis and assessment of the financial condition of the enterprise.
The main indicators of profitability are: profitability of the company's products, return on equity and overall profitability.
Product profitability is a reflection of the ratio of profit per unit of sales. This indicator increases with rising prices for products with constant production costs or a decrease in production costs while maintaining constant cents for products sold.
Return on equity shows the efficiency of use of all property held by the enterprise.
The overall profitability (profitability of the enterprise) expresses the ratio of retained earnings to the average value of fixed assets, as well as normalized working capital. This ratio of funds to costs shows the profitability of the enterprise. In other words, the level of overall profitability, reflecting the growth of invested capital, is equal to the profit generated before interest is calculated, multiplied by 100% and divided by assets.
Overall profitability is a key indicator used to analyze profitability. To more accurately determine the development of the organization, two more indicators are calculated: the profitability of production turnover and the number of asset turns.
Profitability of turnover is equal to the dependence of gross revenue on costs. The number of capital turns is equal to the ratio of gross revenue to the amount of capital.