Calculation of the profitability of sales and its analysis

Financial diagnostics of any enterprise studies its activity from various aspects and points of view. One of them is profitability indicators, which indicate the level of efficiency of the company. The ability of the enterprise to generate profits, as well as the relative value of this profit, must necessarily be studied, since they allow us to judge the development of the enterprise, and also help to compare different enterprises among themselves by the criterion of efficiency. Let's consider in more detail how the profitability of sales and profitability indicators in general are calculated, and how they can be interpreted.

If we look at any coefficient of profitability, for example, on the profitability of sales, then we note that they are all calculated in an absolutely identical way. Each of the indicators of this group represents the amount of profit attributed to the size of the profitability of which it is necessary to assess. The differences are, obviously, in what stands in the denominator, and also in the fact that different profit indicators can be used.

For example, the calculation of the profitability of sales can be carried out either on profit from sales, or on the value of net profit. The coefficient calculated by the magnitude of the profit from sales is characterized by the fact that it describes the efficiency of production and its implementation. However, the impact on profit of other factors, including income tax, in this case is not taken into account. You can take into account these factors if you determine the profitability of sales on the basis of net profit. In this case, the result will indicate the share of net profit in each monetary unit of revenue.

Pay attention to the fact that the calculation of profitability of sales is made solely on the basis of the income statement. This suggests that both the numerator and the denominator are identified in an identical way, that is, they represent the amount accumulated over a certain period. The reason for this to be paid attention is related to other indicators of profitability, which are calculated using also data from the balance sheet of the enterprise. In this reporting format, information is reflected on a specific date, which means that it could change during the period. This change should be taken into account, therefore, for example, the profitability of assets should be calculated on the basis of the average for the period of value of these assets.

The calculation of the profitability of sales, as well as of any other indicator of profitability, must necessarily be accompanied by an analysis of the results obtained. The simplest method, which, nevertheless, is very useful and effective is carrying out comparisons. Naturally, you first need to analyze the dynamics of profitability within a single enterprise, that is, compare indicators for several periods. This will determine the most significant trends that characterize the change in profitability. Then, if you have the necessary information, you can compare the profitability of the enterprise in question with those of other organizations, as well as with industry average values. In addition, it is useful to conduct a factor analysis of the profitability of sales and other factors. This method allows you not only to determine the change in the indicator over time, but also to identify the reasons for this change. Specific methods of such analysis have long been developed and are successfully used for financial diagnostics.

The definition of indicators and analysis should be only a basis for the next stage - the adoption of managerial decisions. It is the decisions and the carrying out of the necessary measures that must be the result of the implementation of the company's financial diagnostics to help improve the situation in which the firm is located.