How to calculate and analyze the profitability of products sold?

In the course of its activities, most enterprises produce one or another type of product. Of course, an organization can perform work or provide services, but it does not change the essence. Employees of the enterprise use certain raw materials, materials or something similar, carry out certain actions with them, as a result of which this product is obtained. Then it must be sold to return the costs and make a profit. Of course, such a description is very conditional, but the meaning is extremely clear. In the course of the production process, the enterprise incurs costs, and as a result wants to make a profit. The relationship between these values is reflected with the help of profitability indicators, one of which is the profitability of the products sold.

So, first we will determine how to find the profitability of the products, which was sold by the firm. To do this, it is just necessary to divide the profit into cost. But the whole problem is precisely what kinds of profit and cost should be included in the calculation. Let's start with the numerator, that is, with profit. Of course, the vast majority of profitability indicators are calculated on the basis of net profit. Profitability of products sold to you, too, no one hinders to calculate this way, but this will not be entirely true. The fact is that other income and expenses, which do not have any relation to sales, also affect net profit. In this regard, it will be much more accurate to use the profit from sales, which you can easily find in the financial statements.

Let us pass to the denominator of the fraction, which is the cost price. Since we are assessing the profitability of the products sold, then we should use the same cost price. But not everything is so simple, because the cost price can be production or complete. Between them to make a choice is also very simple. The production cost does not include the costs that are associated with the sale of products, so this value can not be used for our purposes. Thus, the calculation should include the full cost price, which consists both of the cost of production, and the implementation.

Having determined the calculation methodology, we can finally move on to the economic meaning of this indicator. The profitability of the products sold shows how much the company profits from each ruble, which was invested in the formation of the full cost of production. This indicator combines the efficiency of not only production but also implementation. This is the value of this type of profitability.

We should mention a few more indicators, which are in many respects similar to the one already considered. When used in the calculation of production costs, we will be able to assess exactly how effective the company's production activities are. Obviously, this indicator will be higher than the previous one, since not all costs will be taken into account in the denominator.

And if in the denominator we not only take into account all costs, but add profits to it, we will get the revenue value there. As a result of the calculations, we will determine the value of profitability of sales, which characterizes the share in the proceeds of the profit that the firm receives by selling its products.

A feature of all such indicators is that normative comparisons are not used for their evaluation. The most effective methods for studying profitability are horizontal analysis, which is an analysis of the dynamics, as well as a comparison with the indicators of similar enterprises and with the average values for the industry to which the company belongs.