In the system of economic indicators that determine the effectiveness of entrepreneurial activity, an important role is played by the indicator of profitability.
Profitability of an enterprise is the profitability of an entrepreneurial activity or enterprise.
In the event that profit is expressed in absolute terms, then answering the question of what is profitability will be quite simple. This term is understood as the intensity of production, since it shows the level of profitability of the enterprise in relation to a specific base. An enterprise will then be considered profitable if the proceeds from the sale of products are sufficient not only to cover production and sales costs, but will also allow generating profits.
Return on production assets
This ratio can be calculated in various ways. Before perestroika in Russia, it was calculated as the ratio of the company's profit to the sum of material circulating assets and fixed assets. In the previous economic conditions, the coefficient was planned, and it was assumed that it would stimulate the best use of production assets. But, as time has shown, this goal was not achieved. However, until now, answering the question of what is profitability, and how is it measured to reflect a generalized assessment of profitability, it is calculated in this way. This indicator has transformed into a return on assets. It reflects the ability of assets to be profitable.
Production profitability
This indicator is calculated as the profit from sales divided by the sum of the costs of producing goods and their sales. The coefficient reflects how many rubles of profit the company receives from the ruble spent on the sale and production of goods. It can be calculated for certain types of products and divisions of the enterprise, and for the entire enterprise as a whole.
Return on equity
This ratio is calculated as the quotient of dividing net profit by equity. It reflects the return on investment in terms of net profit.
Product Profitability
Also, when analyzing entrepreneurial activity, product profitability is used , which is determined by the ratio of profit from the sale of goods to its total cost. The use of this coefficient is rational when performing on-farm analytical calculations, introducing new types or removing old inefficient products from production, while controlling the loss-making or profitability of certain types of goods
Return on sales
Given the fact that profit can be associated with both cost and price, the answer to the question what is the profitability of an enterprise can be as follows: the ratio of profit to sales revenue, that is, the cost of goods sold. This ratio is called return on sales. It shows a company's ability to keep costs under control. Due to differences in product lines and competitive strategies, there is a variety of profitability values across companies.
The last two coefficients are interconnected. They characterize the change in costs for the production of goods and their implementation both for individual types and for all products as a whole. Therefore, the assortment planning process takes into account how an indicator of profitability of one type will affect the indicator of all products.
When answering the question of what is profitability, the value of this indicator should also be noted. Its growth is always caused by positive economic processes and phenomena. This is an improvement of the management system, more efficient use of resources, which will lead to lower costs and, as a result, increased profits.