Profitability is a relative indicator that characterizes economic activity. This indicator in the complex reflects the efficiency of use of labor resources, cash, tangible assets and natural wealth. Profitability is calculated as the ratio of profit received during the period to the assets forming it. Profitability of sales is the main component of any business model. Formulas for calculating profitability can be seen in any textbook on financial management. However, not every novice entrepreneur calculates how to determine the profitability of sales. As a result, it often turns out that capital was not invested in a profitable business and the expected income was not received. That is why it is almost impossible to build business plans and implement any enterprise strategy without calculating the profitability ratio.
The main indicators of profitability include:
- profitability of products ;
- return on sales;
- profitability of existing assets;
- the profitability of fixed assets of the enterprise;
- coefficient of the base indicator of the profitability of the assets of the organization;
- profitability of own available capital of the enterprise;
- return on invested capital;
- the profitability of the total asset;
- profitability of net own assets;
- margin margins;
- the profitability of the used and applied capital;
- return on business assets.
Thus, return on sales is a coefficient that characterizes the share of the organization’s profit in one ruble received. Often, the profitability indicator is calculated as the ratio of the net profit actually received for the period for a specific period of time to the sales volume, expressed in monetary terms. Thus, sales profitability is defined as the ratio of the company's Net profit for a given period to Revenue for the same period (profitability = net profit / revenue).
In addition to the above calculation formula, there are other calculation options, but still, only profit data is used to calculate them. For example, instead of the net profit ratio, gross margin, profit before tax in the reporting period, profit before tax and interest, operating profit and others can often be used. The choice of a specific option depends only on the purpose of the analysis and the specific working conditions of the company.
Return on sales is considered an indicator of enterprise pricing policies and their ability to control costs. Differences in strategies and different product lines determine a wide variety of profitability ratios in different companies. Comparison of quantitative indicators of profitability of two or more enterprises operating in the same market can show which of the enterprises focuses on the margin and which on the back. A very significant comparison of two different indicators - gross profit and net. If the rate of net profit received is less than gross, then from this we can conclude that the profit is mainly generated mainly from the main or main activity of the enterprise.
From the foregoing, we can conclude that this concept is the main indicator for the normal functioning of any enterprise. It reflects profitability and profitability, the level of return on the use of fixed assets, therefore, requires careful calculation. No entrepreneur should neglect this most important indicator of the economic activity of his enterprise, as, indeed, of all other indicators.