Profitability Concept

Profitability is one of the analyzed variable by the economical and financial analyses and represents the return rate (or income) of certain magnitude: for example, the profitability of a machine can be understood as the comparison between the net earnings provided by the machine compared with the value of that machine. In the case of a company, its profitability can be understood as earnings provided by the company compared with its own value. Taking into account that the earnings provided by the company are the net results (NR) and that its value corresponds to the value of its medium equity (ME), we have the profitability of the company (commonly designated by return on equity) we have to:

ROE = NR / ME

Beyond the return on equity are also used other profitability indicators as for the sales profitability and assets profitability. In the case of the sales profitability, is calculated using the division of the net results by the value of the sales; as for the assets profitability, is calculated using the division of the net results by the assets net value (sometimes, for decision taking as to funding, assets profitability is calculated considering not the net results but rather the net results before the funding financial costs, getting the designated investment profitability).