Profitability is the most significant indicator of an enterprise's performance, characterizing its effectiveness and economic efficiency. It shows the rate of return of the firm, expressed as a percentage. Profitability is a relative measure. It can be used to judge the performance of enterprises with the same profit.
Instructions
Step 1
The profitability of a firm is characterized by a number of factors. The most common is the return on sales ratio. It is calculated by dividing the amount of net profit by the total sales (revenue). However, this coefficient is not very indicative. It does not take into account the level of costs that were necessary to teach the result. Therefore, it varies greatly in different industries.
Step 2
The most accurately reflects the efficiency of the firm's profitability ratio. It is defined as the share of net profit in the total cost. This ratio shows how much net profit the company has received per one monetary unit of costs.
Step 3
The return on assets ratio makes it possible to determine how efficiently the company uses its assets. It shows how much net profit is received for each monetary unit of the firm's assets.
Step 4
The return on assets ratio can be divided into two types. The rate of return on non-current assets, which is calculated by dividing the value of fixed assets by the amount of net profit, shows how efficiently the company uses long-term assets and how quickly they pay off. The profitability ratio of current assets characterizes the efficiency of the use of funds employed in one production cycle.
Step 5
The indicator of great importance for the investors of the enterprise is the return on equity ratio. It is calculated as the share of net profit in the volume of the firm's capital and characterizes the efficiency of capital use by the owners of the enterprise.
Step 6
The most important indicator of the investment attractiveness and competitiveness of a company is the return on investment ratio. It is determined by dividing the volume of net profit by the sum of long-term liabilities (equity and long-term liabilities).
