Each economic activity has as its goal the profit (or positive profitability). And what is it from an economic point of view? The answer to this question will be considered in the framework of the article. Also, besides this, it will be agreed what is the rate of return and how to calculate it.
What is profitability?
Profitability in the economic sciences means a
relative indicator that shows the effectiveness of investments in individual assets, projects, financial instruments or in the whole business. From a mathematical point of view, this indicator can be considered as the ratio of the total amount of received funds to a certain base. What do you mean by it?
Under the base understand the amount of initial investments or the amount of money that had to be invested in order to get this amount of money. Therefore, the entire system for assessing effectiveness is also called the rate of return. Can this indicator be viewed from the negative side? Yes, profitability can be positive and negative. Under the first understand that the company returned the money spent and still remained with a plus. Negative returns mean that the invested funds have not paid off and there is no need to talk about net profit.
Rate of return
This indicator is necessary to assess the effectiveness of invested funds. The rate of return is the term used to denote the effectiveness of invested funds. So, if the word “internal” is ahead, then this means that the current value of the investment is zero, and all funds received that go as profit from economic activity are equal to the costs at the start of the business or project. With its help, you can determine the level of investment, which in any scenario will cost no loss to the owner of the money. Using the internal rate of return, the level of return on investment is shown, as well as the maximum amount that it makes sense to invest in this company.
Profitability Ratings
If you buy stocks, then how to find out their past, how much did they bring profit to their owners a month or a year ago? Especially for this there are special ratings of profitability. They select the best
securities that provide the greatest benefits in the short term. The profitability rating, in addition to the amount of profit, may also contain indicators of value. And if the
securities of the company are listed on exchanges for a long time - years or decades, then you can assess the trend of their development and it is better to decide whether to purchase them or not. Profitability is a serious indicator and should be determined using the maximum amount of information.
Payment
How to calculate profitability? To do this, use the simple formula:
D = (SFACP - SFANP) / SFANP.
These abbreviations are deciphered as follows:
- D - profitability.
- SFACP - the value of financial assets at the end of the period. Mandatory of what is being researched.
- SFANP - the value of financial assets at the beginning of the period. Mandatory of what is being researched.
Predictive values can also be used as values. So, you can know the value of shares at the beginning of the year, see the expected value and decide whether to purchase a security or not. But doing something with only predicted profitability in front of you is a thankless task. It does not hurt to know about the state of affairs in past years.
When comparing rational investment strategies, profitability and risk always move in the same direction with changes, ceteris paribus. So, the higher the profit, the greater the risks exist.
To clarify, you can use an example: two people come to the bank. The first is a well-to-do citizen who has a stable and well-paid job, a house and asks for a loan. The loan is issued at 20% per annum. The second person is interrupted by casual earnings, abuses alcohol and has a number of other bad habits. He is given a loan at 40%. Further, the bank completes all the obligations of such people as person No. 2 in one portfolio of securities and sells it with such a high level of profitability. But if you think about it: where can you earn more? With the second option, profitability is greater. With the first person, returns are lower. But here is also less likely that he will refuse to pay you money. Therefore, when considering investment proposals, it should be remembered that profitability is not the only parameter that should be considered.
Conclusion
Therefore, in the end, we can conclude: the higher the yield, the greater the risk. Excessively high opportunities for loss of investments are not attractive to investors, so most prefer to send their money to something relatively safe and stable. Profitability is a mandatory parameter, because without it it makes no sense to invest your money in something.