What is profitability, and how is it calculated?

In the system of economic indicators, which determine the effectiveness of entrepreneurial activity, an important role is played by the profitability index.

The profitability of an enterprise is the profitability of an entrepreneurial activity or enterprise.

In the event that the profit is expressed in an absolute amount, then to answer the question, what is profitability, will be quite simple. This term is understood as the intensity of production, because it shows the level of profitability of an enterprise in relation to a certain base. The enterprise will then be considered profitable if the proceeds from the sale of products will be sufficient not only to cover production and sales costs, but also to generate profit.

Profitability of production assets

This coefficient can be calculated in various ways. Before perestroika in Russia, it was calculated as the ratio of the enterprise's profit to the amount of material working capital and fixed productive assets. In the previous conditions of management the coefficient was planned, and it was assumed that it would stimulate better use of production assets. But, as time showed, this goal was not achieved. However, to this day, answering the question of what profitability is, and how it is measured to reflect a generalized assessment of profitability, it is calculated in this way. This indicator was transformed into profitability of assets. It reflects the ability of assets to make a profit.

Profitability of production

This indicator is calculated as the profit from sales divided by the sum of costs for the production of goods and their sale. The coefficient reflects how much the company's profit comes from the ruble spent for the sale and production of goods. It can be calculated for individual types of products and divisions of the enterprise, and throughout the enterprise as a whole.

Profitability of equity capital

This ratio is calculated as a quotient from dividing the net profit by the company's own capital. It reflects the return on investment in terms of net profit.

Profitability of production

Also, when analyzing entrepreneurial activity, the profitability of products is used, which is determined by the ratio of profit from the sale of the product to its full cost price. The use of this coefficient is rational in the implementation of on-farm analytical calculations, the introduction of new types or the removal of old inefficient products, while monitoring the loss or profitability of certain types of goods

Profitability of sales

Taking into account the fact that profit can be associated with both the cost price and the price, you can answer the question what is the profitability of the enterprise in the following way: the ratio of profit to sales revenue, that is, the value of sold products. This ratio is called the profitability of sales. It shows the company's ability to keep costs under control. Due to differences in product lines and competitive strategies, there is a variety of profitability values in different companies.

The last two coefficients are interrelated. They characterize the change in costs for the production of goods and their sale both for individual species and for all products as a whole. Therefore, during the planning of the assortment, it is taken into account how the indicator of profitability of one type will affect the index of all products.

Answering the question, what is profitability, we should also note the value of this indicator. Its growth is always caused by positive economic processes and phenomena. This improvement of the management system, more efficient use of resources, which will lead to a reduction in production costs and, as a result, profit growth.