Profitability is an indicator that is expressed in relative terms and shows the profitability of the business, expressed as a percentage. Sometimes profitability in nonprofit enterprises means efficiency. Profitability is determined by the ratio of costs and profits. The resulting coefficient shows how the result of the entrepreneurial activity of the company covers expenses.
You must understand that profit and profitability are different concepts. The profit obtained for one enterprise can be considered enormous, and for another - insignificant. There are profitability criteria that determine profit taking into account the size of the enterprise. Thus, profitability is calculated. This is the ratio of income to capital invested in the enterprise. One of the indicators of profitability can be considered the ratio of profit (net, as in the balance sheet) before taxes (percent) to the total amount of long-term finances. The second indicator is calculated as the ratio of the same profit after tax (interest) to the available share capital. The indicated coefficients are rather successfully used when comparing two homogeneous companies and their indicators with the average figures for this industry. For a correct comparison, you need to take profitability indicators for at least the last three years. And you need to compare several indicators at the same time.
Economic profitability is a coefficient that is calculated as the ratio of retained earnings to cost of capital. All necessary indicators are taken from the balance. This ratio will show the amount of profit that the company receives per unit of cost of capital, represented by the total amount of all resources, regardless of their financing sources.
Profitability is divided into pure and general. The calculation of its coefficients is applied both to individual products and to the results of entrepreneurial activity of the enterprise as a whole.
So, the total return on assets is represented by a value that reflects the amount of finance that the enterprise raised to make each ruble profit. It is calculated by the ratio of profit to the average value of assets for a certain period (quarter, half year, year).
Profitability of production is a general indicator that characterizes the economic efficiency of all business activities of the company and its structural divisions. It is calculated by the ratio of profit (net income) to the cost of manufacturing finished goods. The profitability of the enterprise can only be when the excess of income over expenses.
An increase in the profitability indicator can be promoted only by a reduction in the cost of finished products while improving its quality.
Product profitability is the ratio of profit to related production costs (cost of finished products). This coefficient shows the effectiveness of both production as a whole and the sale of manufactured goods or services in particular.
Profitability is the definition of efficiency, both for all products and for individual types. A modern definition of the economic condition of the enterprise is made using such new indicators as the main coefficient of profitability and the rate of return on capital, which is determined in the balance sheet as own. The latter indicator is calculated by the ratio of net profit to average equity. The ratio shows the degree of return on equity and characterizes a prerequisite for development and retention in the companyโs market.
Thus, profitability is an indicator of the efficiency of using current and non-recurring costs.