Perhaps, if you ask any person about what indicator he could name as the main indicator of the performance of a particular company, this indicator would turn out to be profit. This is understandable, because profitability largely determines whether the enterprise will even exist in the future. However, different organizations can be profitable in different ways, but they still need to be compared in some way. To this end, calculate the profitability indicators. In other words, profitability is a certain level of profitability.
The methodology for calculating profitability levels is extremely simple, therefore, remembering one ratio, you can calculate any indicator. The essence of the calculation is in relation to the profit made to the value of the profitability of what you want to establish. So, for example, it is quite obvious how to calculate the return on assets: it is enough to divide the net profit or pre-tax profit by the balance sheet total. Profitability is usually expressed as a percentage. In this case, it allows you to judge the effectiveness of the use of property that is the property of the organization. As you can see, the numerator can have different profits, which is a feature of this group of indicators. Depending on your choice, indicators may vary, which allows us to regard them as sufficiently subjective.
In addition to the profitability of all property, you can determine the profitability of current assets and non-current. Obviously, for this it is necessary to divide the profit by the result of the corresponding section of the balance sheet, and then express it as a percentage. The profitability of current assets shows their ability to make a profit, as well as the efficiency of their use. The meaning of the profitability of non-current assets is similar.
Profit can be compared not only with assets, but also with liabilities. Of most interest is the return on equity of the organization, that is, the amount of profit attributable to the unit of capital of the owner. Using this criterion, one can compare various enterprises from the point of view of the owner, for example, in order to choose the most attractive investment object.
When we calculate the return on current assets, the denominator is the sum of these assets. One of their components is the finished product, that is, its cost. Calculating product profitability can also be very useful. This indicator will characterize how much profit is generated by the funds that generated the costs. For its calculation, the indicator of profit from sales is traditionally used.
Profit from sales is also used in determining the profitability of sales, which is logical. The meaning of this profitability lies in how much of the company's revenue is profit.
The determination of all the indicators described above for one period may be insufficient. The fact is that they do not have normative values, therefore, they can only be compared with each other. For such a comparison, you can use either industry average indicators or indicators of analogous enterprises. Of much greater practical interest is the comparison in dynamics, that is, a comparison with the levels of previous periods and the subsequent determination of certain trends. Obviously, reducing profitability requires identifying the causes of the deterioration, and its growth - identifying factors that can be used in the future.
Of considerable interest is factor analysis, which allows one to evaluate the isolated and cumulative effect of various factors on each of the indicators of profitability. For example, the profitability of current assets depends on the profitability of sales and the turnover of this part of the assets. By using the methods of chain substitutions or absolute differences without any difficulty, you can identify the factors whose influence is most strong, and then use the results to make the most effective and informed management decisions.