The financial diagnostics of any enterprise studies its activities from various angles and points of view. One of them is profitability indicators, which indicate the level of efficiency of the company. The ability of an enterprise to generate profit, as well as the relative magnitude of this profit, must be studied, since they allow us to judge the development of the enterprise, and also help to compare different enterprises with each other by the criterion of efficiency. Let us consider in more detail how the calculation of profitability of sales and profitability indicators in general are performed, and how they can be interpreted.
If we take a look at any profitability ratio, for example, an indicator of profitability of sales, we will notice that they are all calculated in exactly the same way. Each of the indicators of this group represents the amount of profit related to the size of the profitability of which must be assessed. The differences are, obviously, in what is in the denominator, and also in that you can use different profit indicators.
For example, the calculation of profitability of sales can be carried out either by profit from sales, or by the value of net profit. The coefficient calculated by the amount of profit from sales is characterized by the fact that it describes the efficiency of production and sales. However, the effect on profit of other factors, including income tax, is not taken into account in this case. These factors can be taken into account if you determine the rate of return on sales based on net profit. In this case, the result will indicate the share of net profit in each currency unit of revenue.
You should pay attention to the fact that the calculation of profitability of sales is made solely on the basis of the profit and loss statement. This suggests that both the numerator and the denominator are defined identically, that is, they represent the amount accumulated over a certain period. The reason why you need to pay attention to this is related to other indicators of profitability, which are calculated using data and from the balance sheet of the company. In this reporting form, information is reflected on a specific date, which means that it could change during the period. This change should be taken into account, therefore, for example, the return on assets should be calculated on the basis of the average value of these assets over the period.
The calculation of profitability of sales, like any other indicator of profitability, must be accompanied by an analysis of the results. The simplest method, which, however, is very useful and effective is to make comparisons. Naturally, it is first necessary to analyze the dynamics of profitability within the framework of one enterprise, that is, to compare indicators for several periods among themselves. This will determine the most significant trends that characterize the change in profitability. Then, if there is the necessary information, it is possible to compare the profitability indicators of the enterprise in question with similar indicators of other organizations, as well as industry average values. In addition, it is useful to conduct a factor analysis of return on sales and other ratios. This method allows not only to determine the change in the indicator over time, but also to identify the causes of such a change. Specific methods of such analysis have long been developed and are successfully used for financial diagnostics.
The definition of indicators and analysis should be only the basis for the next stage - making managerial decisions. It is the decisions and the necessary measures that should be the result of the financial diagnosis of the company in order to improve the situation in which the company is located.