General concept of profitability
Such a major economic indicator, as profit, is in its essence a final indicator of the economic activity of an enterprise in an industry. However, it does not characterize and does not show the amount of money spent. The profit also does not reflect the size of the production potential with which it was obtained. In order to compare the amount of profit and the amount of money spent to achieve it in the economy of any industry, a level of profitability is used. This indicator is a characteristic of production efficiency, as well as the effectiveness of the activities of companies.
Profitability of production activities
The level of profitability of production measures the amount of profits and the size of those monetary resources in the form of working capital and fixed assets, with the use of which it can be obtained. The above mentioned means used in production for obtaining the expected profit are in some way its price.Moreover, the higher the price, the greater the amount of funds required with the same amount of profit. And the lower this price, the higher the production efficiency and the more effective the operation of the enterprise.
The level of profitability that does not have a fixed value, approved in some regions to support a certain price level, fully corresponds to the axiom outlined above. The period of activity of the enterprise can be equal to a month, quarter or year. Therefore, the cost of working capital and fixed assets is calculated in average values. The level of profitability can be generally determined in any time interval and in any fixed period of operation to understand the level of efficiency of certain operations in production. Basically, with a certain stability in the implementation of activities, this indicator is calculated for the year and quarter.
The level of profitability in sales
According to the industry classification, the level of profitability differs as a general and calculated.In this vein, it is advisable to consider trade. Thus, the level of profitability of sales, represented by the corresponding ratio, shows the share of profit in the earned one ruble. Basically, the calculation is performed by finding the ratio of net profit for a certain period to the size of sales for the same period, expressed in monetary terms. This level of profitability is a kind of indicator of a certain pricing policy of the organization and its ability to control its costs. But the difference in the strategies of some product lines is an expression of a significant variety of levels of profitability in specific companies. This indicator is often used when assessing the effectiveness of an operational organization.