How can you analyze your profitability ratios?


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Profitability analysis :

 

 

After the calculations are made and the profitability ratios are obtained, you can proceed to the analysis. 

 

Taking into account the current tasks, it can be aimed at determining the economic potential of the company from scratch or assessing its financial results. 



In financial reporting, three types of profitability analysis are used: 



  • Comparative



  • Factorial



  • Index.



Comparative analysis :

 

 

This method is made to compare individual profitability indicators within the company or the corresponding indicators of competitors. 

 

 

The analysis is carried out in dynamics, allowing you to evaluate the effectiveness of the business as a whole and its attractiveness as an object for investment.

 

 

In the course of comparative analysis, you can obtain information about the profitability of a company in a particular area. 



It can also help you to build a picture of your business prospects, taking into account the position of other organizations in the niche.

 

 

Factor analysis :

 

 

Financial profitability analysis may involve a factorial method that includes several models. 

 

 

All of them are necessary to identify the relation between the factors determining profitability. 



We can divide them into 3 categories :

 

 

  • Additive - for cases when there is a sum of factors.

 

 

  • Multiples - when a fractional value is calculated by dividing the factors one by one.

 

 

  • Multiplicative - when the value is expressed as a product of factors.

 

 

The models above can underlie multi-factor combinations using profitability ratios.

 

 

Index Analysis :

 

 

It can be used for profitability analysis regardless of the scope of the company and the legal form. 

 

 

This method allows you to analyze one or several enterprises at the same time using the following indices :

 

 

  • Variable composition.

 

 

  • Permanent (fixed) composition.

 

 

  • The influence of structural shifts.

 

 

Indexes indicate relative values ​​that may indicate any events. 

 

 

The study of profitability by the index method shows the evolution of the indicators for a given period compared to previous periods.