Profitability is one of the indicators of the business activity of the enterprise, which are necessary for making management decisions. It is used in the analysis of financial statements, the assessment of economic activities, the pricing process. The level of sales efficiency characterizes their profitability.
The profitability of sales shows what part of the company's revenue comes from profit, and is expressed by their ratio:
Return on sales = Profit / Revenue x 100%.
At the same time, its calculation can be made for various types of profit: gross, operating, that is, from core activities, and net. Calculation formulas are as follows:
- Return on sales by gross profit = Gross profit / Revenue x 100%;
- Operating profitability = Profit from sales / Revenue x 100%;
- Net profit margin = Net profit / Revenue x 100%.
The net profit margin shows how much net profit the company has from 1 ruble of sales, that is, how much free money remains at its disposal after financing the costs of core activities, paying interest on loans, other expenses and paying taxes. The gross profit margin characterizes the main activity of the company and allows you to determine the share of the cost price in sales and the trade margin.
The profitability of sales is calculated according to the data of the profit and loss statement (form No. 2 of the balance sheet) as of the reporting date. For an objective assessment, you need to consider it in dynamics, that is, over several periods. Based on the analysis of the change in the coefficient, we can conclude about the effectiveness of business management: growth indicates competent and correct decisions of the organization's management, and a decrease - about possible problems in the activities.
A change in the profitability ratio of sales in one direction or another can be associated with various factors: an increase in the absolute indicator of profit, a decrease in sales, etc. It is important to determine the reasons: with an increase in prices for products and services, the value may be normal and low, but if it is associated with a decrease in consumer demand and interest in the company's product, this is regarded as an alarming factor.
Against the background of the introduction of promising technologies or the development of new types of activities, there is often a temporary decrease in the profitability of sales. However, with a correctly chosen development strategy, the investments will pay off in the future, and the profitability ratio can grow to the previous level and overcome it.
