Profitability is a coefficient that reflects the efficiency of the company. It can be either positive or negative. In the latter case, this indicator indicates the unprofitableness of the activity.
Concept and types of profitability
Profitability reflects the company's ability to control costs and reflects the correctness and effectiveness of the selected pricing policy. Also, the indicator is often used to assess the operating efficiency of companies.
The calculation of profitability is often carried out quarterly and annually, tracking its dynamics in relation to the previous period. The analysis of profitability must be carried out for each group of produced (sold) goods.
In economic analysis, several types of profitability are distinguished, the most commonly used are:
- profitability of sales - reflects the efficiency of the organization's financial activities, shows what part of the company's revenue is spent on profit
Profitability of production = net profit from sales (provision of services) / cost * 100%.
Return on sales = net profit / revenue * 100%
- profitability of production - shows how effectively the property of the enterprise is used.
There is also a distinction between the return on assets and production assets (the indicator reflects the percentage of profit earned on the average value of assets or production assets), return on equity (an indicator of the efficiency of using the company's or bank's own funds). When evaluating investment projects, the indicator of return on investment is used - it is calculated as the ratio of net profit to the cost of initial investment.
The essence of negative profitability
Negative profitability is an important signal for the company's management; it shows the percentage of unprofitable production or sales for each ruble invested in the product. It turns out that the cost of production is higher than the profit from its sale, and the price is not high enough to cover all costs.
The higher the negative profitability indicator in absolute terms, the more the price level deviates from its effective equilibrium value.
The parameter of negative profitability is demonstrative in nature and reflects the inefficiency of the enterprise.
Also, negative profitability signals that the company is ineffectively managing its own assets.
As for the profitability of production, the negative profitability is evidence that the sum of the costs of producing and selling products is higher than the selling price.
If the company's profitability indicators show a negative value, this serves as a reason to raise prices for products or to look for ways to reduce its cost. In this case, assortment optimization can also have a positive effect.
For investors, a negative return on sales is a signal to withdraw funds from the project. This indicator shows that capex has started to work negatively.
