If you are reading this blog then you are very keen to profitability. I hop that after reading this blog you will definitely get to know where is your business.
While businesses are launched for various reasons - the final result of filling a necessary gap in the market, relying on opportunities, fulfilling individual ambitions, and other, continuous operations can be only one - profitability. Without profit, long-term survival becomes a challenge
In this scenario, it is very important to measure current and past profits and predict this metric for the future.
It brings on a question: how do you analyze profitability? How can you track revenue regularly, make sure the revenue is more than the cost, and know that the business will have enough money to keep itself in the future?
Financial Ratios enables you to answer all the above questions. There are several proportions that provide information about the profitability of a business, but the following four are the most important and commonly used.
The four advantages of this is that the profitability of business profitability Preparation of balance sheet and the details of income / expenditure are an important first step in calculating profit, as all the ratios are derived from the data in financial statements.
Gross profit margin ratio:
This is the original profitability ratio, which is calculated by all companies, to get the gross profit, reduce the price of the goods sold with sales figures. Divide it on the basis of sales figures and multiply it by 100 to get one percent. This is the gross profit margin ratio for the business.
(Sales - Cost of goods sold) / Sales x 100 = Gross profit margin ratio
It tells you whether your company has sold enough goods and services to cover the cost of sales and still has left the capital. Needless to say that this number should always be positive and high enough to have enough effect on the business. If cost is high and sales are low, or gross profit is not enough, then you know that the crisis is big
Net profit margin ratio:
The cost of the sale is not the only cost which the company is going to spend. You have to pay tax on profit. After the tax, devaluation, and other miscellaneous expenses, what substantial benefits have been left out? The net profit margin ratio indicates this, if the company is paying high and there is a need to determine the amount for interest payments and depreciation, then there may not be much hurdrance compared to its profits. In this regard, calculation of net profit ratio The business will be able to boost sales figures.
See numbers like interest, taxes, depreciation and amortization, and net income before net income, after interest, taxes, depreciation and amortization. Many companies after net of tax (NIAT) or net income after taxes and interest, on their balance sheets to figure out how much each stage has been spent and how it affects profitability.
operating profit margin:
Companies can benefit from other means, such as through sale of property or through their investment in non-core sectors. However, it is important to calculate how much revenue is generated for the main business sector and how much it costs to maintain the work of this core sector. Identifying operating income, dividing by sales, and calculating percentage indicates whether it is worth the start or not.
(Operating Income / Sales Revenue) X 100 = Operating Profit Margin
This number should be consistently high for justification for the existence of the company.
Break even analysis:
The amount discussed so far is the basic company that gives information about the overall health of the company. If you are more beneficial then you need to reach the depth to get justice. Analysis of break-up involves selling information to cover expenses, calculating per unit value will help in the cost of the products.
Return on Assets (ROAs) and Investment Returns (ROI) are other numbers which can tell whether the business is using its resources better or not.
Read more: Important Financial Ratios for a Business
However, these ratios should not be seen in isolation. Compare the profits of industry standards based on year-to-year basis. Business will have to make more profit than competition and increase profits over time. Better use of resources can help generate more profit.
Other ways of generating more revenue, increasing the margin and increasing the final income can be tax savings. However, the actual value of these ratios and figures is contained in those you get from them and the work you improve is profits.