The term profitability for each person, to some extent related to economic science, causes associations with the concept of economic activity. If we approach the meaning of the words profitability and efficiency in more detail, then it is easy enough to conclude that these two concepts are very similar in essence.
As a rule, profitability is a ratio of income and expenses and is often expressed as a percentage. From the point of view of economic efficiency, any type of commercial activity that is profitable can be characterized. The criterion of profitability is one of the basic indicators for assessing economic activity in economic analysis. Modern science distinguishes several types of profitability and in some cases it is customary to denote it by the coefficient of profitability, or profitability.
The classification of this financial and economic indicator is arranged in relation to the object of profitability itself. In this case, for example, return on assets and return on production, return on investment and return on sales can be calculated. But far from always profitability indicators reflect the real state of affairs of an economic entity in the short term. If we ignore amateurish thoughts, then modern economic observers are trying to focus on aggregate, or otherwise, gross indicators. Thus, gross margin shows a general estimate of return expressed as a percentage. In the literature of financial orientation, gross margin is considered as a comprehensive indicator of activity in the context of individual types of profitability. Gross sales margin is a kind of assessment of the performance of commercial units of any organization.
A more specific indicator of economic efficiency can only be net profit. The difference between these terms consists in a different calculation methodology, if profit is the difference between income and expenses, then profitability is their ratio. Gross profitability - this type of indicator of economic effect is often applicable with regards to large investment investments. The return on global investment in various sectors of the economy is very difficult to calculate in detail for all types of profitability, since there is a high probability that something will not be taken into account.
In a general sense of the word, gross margin should serve as an assessment of the economic efficiency of the enterprise, which reflects the rational use of labor, material, monetary and other resources. Profitability analysis is carried out regularly in each normally functioning company. Its main purpose is to identify both the least and most profitable aspects of the activity. Based on the results of this analysis, a line of the company's strategy is built in the long and short term. Gross profit margin reflects the share of gross profit, which relates to a unit of revenue.
For a single business unit, which has a small staff and, as a result, insignificant financial flows passing through internal office work, it will be more appropriate to pay attention not only to such an indicator as gross profitability, but also to all its individual types. In this case, you can identify weaknesses, which makes it possible to take measures in a timely manner in order to level their impact on the final result of the activity, that is, on the company's profit.