The main indicator that characterizes the economic activity of the enterprise is profit. The concept of profitability is associated with the relative expression of these indicators. Profitability shows the effectiveness of the enterprise.
It is profitability indicators that provide information for conclusions about the level of development of production and the efficiency of the business entity. Production management requires a comparison of economic performance (in the form of profit) with the costs that made it possible to achieve these results.
The concept of profitability is associated with self-supporting activities of enterprises. This is one of the indicators characterizing the profitability or, conversely, the loss-making of the enterprise in the course of production activities for any time period (year, quarter).
The concept of profitability and its types can be defined as follows. It includes such large groups: profitability of production, capital and production itself.
Profitability of production distinguish the general and estimated. General - means the ratio of profit on the balance sheet to the value (average annual) of fixed assets and working capital. Estimated - represents the ratio of retained earnings minus fixed payments, fees for funds and bank loans to the value of (average annual) fixed assets and current assets.
Profitability of products is calculated as the ratio of profit received from the sale of products to the cost of production, as well as to the cost excluding direct material costs.
Return on equity is determined by the ratio of the result of current activities for a certain period of time (retained earnings) to existing fixed assets and current assets (assets).
Each company is interested in improving profitability. The main factors of this are improving the quality of products, reducing the cost and loss of labor and material resources, more productive use of equipment, etc. In order to increase profitability, it is necessary to improve self-supporting relationships at the enterprise, and to observe a reasonable economy. This is especially important when transferring to self-financing conditions.
To increase profitability, enterprises resort to such measures as increasing production and marketing of products, improving product quality, introducing scientific and technical developments, improving pricing and production process management systems, improving the rationality of using resources based on improving the system of settlement and payment relations and mutual settlements. The possibilities for implementing these areas should be constantly analyzed by the company's specialists.
The concept of profitability defines a qualitative indicator of the efficiency of production, it demonstrates the level of return on costs and shows the degree of use of invested funds in production and during the sale of products.
The calculation of profitability is carried out using a system of indicators: profitability of products, sales, production, equity, long-term financial investments, investments, assets. These indicators are used in the analysis of economic activity to determine ways to improve the efficiency of the main areas of the enterprise. Separate indicators are used to determine the creditworthiness of borrowers.
The level of profitability of the enterprise is the ratio of gross profit to the sum of fixed and current assets that are at the disposal of the enterprise.