In this article we will talk about an aspect that can be decisive for your company to grow sustainably and not go bankrupt. It is about: the calculation of profitability in your company; pay attention because this is crucial for you to know if your business is being profitable or not.
Let’s start with the basics…
A company’s profitability refers to its ability to generate earnings in relation to the resources invested. It is a key indicator of a company’s financial performance and long-term success.
It is important to note that a company’s profitability cannot be analyzed in isolation, but must be considered in the context of its objectives, industry, competition and external factors. Each company may require specific approaches and strategies depending on its particular situation.
Calculating the profitability of a company involves assessing the capacity to generate profits in relation to the investment made. There are several indicators that can be used to measure the profitability of a company. Here I will explain two of the most common: the net profit margin and the return on investment (ROI).
Net profit margin is the measure of how much profit is earned per dollar of revenue generated. It is calculated by dividing net profit by total revenue and multiplying by 100 to get a percentage.
Formula: Net profit margin = (Net profit / Total revenue) x 100.
ROI is an indicator that shows the profitability of an investment in percentage terms. It calculates the ratio between the net profit and the total cost of the investment, and is expressed as a percentage.
Formula: ROI = (Net profit / Cost of investment) x 100.
It is crucial to take other factors into account and consider the big picture before making decisions based solely on these indicators.
Calculating and analyzing a company’s profitability offers several key advantages, including:
Not calculating the profitability of a company periodically can lead to difficulties in obtaining financing, can generate operational and financial inefficiency, and can finally lead you to close your business due to poor financial management because you were not able to be profitable over time.
Now you know how to calculate the profitability of your company and it is something that you should review periodically, however you have to take into account other indicators and also know how to read the socioeconomic context of your environment as well as the other economic variables of your company.
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