Calculation of profitability and its types
What is profitability?
This concept is one of the most important indicators of economic efficiency. It illustrates the amount of rational use of labor, material, monetary and other types of resources. Calculation of profitability is made according to the formula, which is the ratio of the amount of profit to the flows or assets that formed it. The value of the calculated value can determine the state of the enterprise for a sufficiently long period of time. Consider some types of this concept.
Calculation of project profitability
It allows not only to select and calculate the most effective policy of the enterprise, but also to determine the amount of expected profits. Nevertheless, no one person can give an absolute guarantee on the forecast obtained, which means that there is a need for a complete analysis. It will reveal the strengths and weaknesses of the project before you invest in it your money.The calculation of profitability is also necessary for a visual display of the amount of profit for each unit introduced. Therefore, the above indicator is the simplest mathematical action (namely, division). Nevertheless, it is quite difficult to determine the components of both the numerator and the denominator. The calculation of the profitability of a particular project has a number of features that distinguish it from other indicators of rational use. The main problem is that the calculation of this coefficient is made not by ordinary figures, but by the corresponding discounted values. On the one hand, this, of course, is good, since it allows us to visually illustrate the theory of the cost of money in time. On the other hand, this greatly complicates the calculation procedure.
Calculation of return on assets
In turn, it is an indicator that is expressed as the ratio of the amount of net profit to total assets. Thus, you can find out the company's ability to make a profit. Therefore, both of these indicators make it possible to identify the strengths and weaknesses of the object under study and to conclude whether it is worth investing in its own funds.
This indicator is the ratio of the profits from the sale of a unit of product to the cost of its production. The calculation of the profitability of this type allows you to identify the effectiveness of the work for a specific period of monitoring. However, this indicator has a significant drawback: it does not allow to determine the probabilistic and planned result from long-term investments.
Return on equity
Due to the fact that the overall rate of return on capital is a relative indicator, this ratio determines the efficiency of the business as a whole, and also illustrates the profitability of each individual activity.