Profitability, in simple terms, is an indicator of the quality of an enterprise’s work. It reflects how effectively resources are spent within the company. For example, cash, personnel, raw materials, real estate, and other tangible and intangible assets.

A company’s net profit or loss shows how effectively it operates. Profitability is an indicator that is expressed in shares or percentages. Let’s present a general formula or universal profitability coefficient.

The formula shows that profitability depends meters. The “indicator” can be almost any parameter – from revenue and the number of assets to the industry email list value of equity and investments in the project. The numerator most often uses the “net”, that is, the final profit of the company.

Why is it important to be able to calculate profitability?

Overall profitability is a relative indicator. That is, it is measured in percentages or shares and can clearly demonstrate the success of a company regardless of its size and specifics.

In turn, absolute indicators such as profit, margin , income, revenue and cash flows  do not always indicate the success of the enterprise.

The company itself may be very large, with multi-million internal and outgoing links dollar sales, impressive margins and average annual net profit. But due to the huge initial investment in the business, the reality may be mixed.

The point is that profitability is considered a multifunctional indicator that can be useful for different business purposes. Here are some basic situations when the profitability indicator is used:

1. Analysis of the company’s performance

Operating profitability will help determine how trust review productively the business as a whole and its components operate. For example, workshops, branches, individual stores.

It may happen that the net profit of a separate part of the organization, the income and revenue of some branches will grow, but at the same time, for example, the profitability of the entire company as a percentage only decreases.

This indicates inefficiency in capacity expansion, or simply that the current business is starting to generate less net profit compared to the current sales volume. This means that some business processes are disrupted.