Profitability indicators

If you have started your company or have invested in a business that you believe could be successful, it is essential that you know which tools effectively measure the financial profit What are you looking for and if your investment is generating the return you are expecting. 

The economic and financial profitability It is one of the first objectives that every company sets itself to know the result of the decisions that its administration has made. 

According to experts, the financial profit It is the direct relationship between income and costs generated by the use of a company's assets in productive activities and can be evaluated based on sales, assets, capital or share value. 

We will tell you what they are profitability indicators and why they are important to your company. 

What are profitability indicators?

The profitability indicators They are tools that will allow you to measure and analyze whether or not your company is being profitable. 

The indicators of economic and financial profitability they will evaluate the administration of your activities, the management of your expenses and costs and will trace the path to turn your sales into profits. 

The profitability indicators they will be used to judge how efficient the companies are in the use of their assets and will calculate the profits obtained in relation to the initial investment, considering in their calculation the total assets or the stockholders' equity.

It is essential that companies pay close attention to these indicators of economic and financial profitability to produce profits at the end of its fiscal year, attract external capital and have normal and more efficient operations. 

To calculate the profitability indicators It is necessary to take into account three important aspects: 

1.- There must be a causal relationship between resource and investment.

2.- The average of the period must be considered for its calculation. 

3.- Define the time that profitability is sought, since in shorter spaces it is usual to make mistakes. 

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What indicators of profitability exist?

We will tell you in detail four types and formulas of profitability indicators that companies should consider to know if they are on the right track.

1.- Gross profit margin: this profitability indicator Use the formula by dividing gross profit over sales and multiplying by 100. 

We remind you that gross profit is obtained according to operating income, that is, total sales and cost of sale. 

Operational costs are all the income that comes from your main economic activity, while non-operational costs come from secondary activities that may be occasional. 

2.- Operating margin: This indicator is obtained by dividing the operating income by the net sales multiplied by one hundred. Operating profit is obtained by subtracting operating expenses from gross profit. 

This indicator allows you to know if your company's own operations are working without depending on secondary activities. 

3.- Profit margin before taxes: To obtain this margin, it is necessary to calculate the operating profit by subtracting other non-operating expenses from total sales. This indicator will allow you to identify the profit of your company before paying your taxes. 

4.- Net profit margin: This indicator is obtained by subtracting gross profit minus expenses and taxes from total income and multiplying by one hundred. 

The net profit margin will allow you the ability of your company to generate profits from your operating income or total sales. 

All the indicators will help you understand the operation of your company and above all its profitability, which is called the income statement. 

If you use a single profitability indicator, you will have an incomplete vision and you will make the wrong decision about the destiny of your company. 

It is advisable to carry out this complete analysis every year and thus have clear information about the profits you obtain from your business or investment. 

Conclusion

If you are wondering where to start, we recommend that you seek help from experts or experienced professionals. 

Alter Finance is a leading consulting firm that has specialized in Trade Finance and Working Capital Finance. Its main objective is to advise large companies and SMEs to have access to financial solutions global non-banks.

We understand that each organization has its nature and objectives in the short, medium and long term, however, it is important to have the necessary financial knowledge to meet those goals and analyze the options of unconventional financing that your company needs.

Ask us and we will inform you about the best competitive conditions according to the economic situation of your company, allowing the entry of strategies that are optimal and you will obtain the better financing.

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