No business will prosper if we do not take care to maintain the financial liquidity of a given enterprise. Nevertheless, you should also decide from time to time to perform a financial analysis, specifically a profitability analysis. What is it and what are its indicators?
What is profitability analysis?
Financial analysis should be carried out by both large corporations and small companies. One of its most important components is the profitability analysis. The results obtained by calculating the profitability analysis inform us about the extent to which a given company is able to generate profit. The purpose of profitability analysis is to establish the relationship between profit and loss. Usually, the higher the ratios, the better the company’s profitability. High profitability of a given company means that its activity is profitable and contributes to an increase in its value.
The profitability of the company
The profitability of a given enterprise is reported, among others, by about the speed of return of the capital invested in the company. It is considered in three shots. You can distinguish, among others profitability of sales, profitability of assets and profitability of employed equity. It must be remembered that when calculating profitability, it is possible to get a positive or negative result when the company has made a loss.
Profitability of sales
The return on sales indicator informs whether a given sale is profitable. It just means the revenue we got on the net profit margin. The ratio is calculated as the quotient of the net profit and the value of the generated sales revenue. Importantly, the net profit margin should not fall in the long run. It can stay constant or increase. The high level of the ratio tells us that each zloty obtained gives the company more and more profit. Such an analysis allows us to determine whether a given company can effectively position its pricing strategies.
Profitability of the property
The return on property defines how a given enterprise manages its assets. As you can easily guess, the higher the value of this indicator, the better it is for a given enterprise. The profitability of assets depends mainly on the profitability of net sales and the speed of rotation of the employed assets. Entrepreneurs calculate the ROI to compare how they compare to the competition of companies operating in the same industry.
Profitability of engaged equity
An important indicator is also the return on equity. Thanks to it, it is possible to determine how much profit the contributed equity has earned for the company. The higher the index value, the more favorable the situation for a given enterprise. Importantly, it is this indicator that is considered to be one of the most important indicators in a market economy. Thanks to its calculation, we can obtain information about the profit rate that an investment in stocks or shares brings.