Analytics for Retail by Rhoda Okunev

Author:Rhoda Okunev
Language: eng
Format: epub
ISBN: 9781484278307
Publisher: Apress

Profitability Ratios

Profitability is important for all companies, but this book focuses on startups and small to medium-sized companies. Profit is incurred when expenses are subtracted from the revenue. Without profit, the company will not be able to secure any additional loans, attract investors, or grow. There are many different types of revenue KPIs that companies use to evaluate their businesses. There are six forms of revenue-generating KPIs the book discusses: profit margin, gross profit margin, net profit margin, EBITDA, operating profit, and return on assets. Profit margin is the percent profit made from the revenue generated. Gross profit margin is the revenue less the cost of goods (COGS) and a way to evaluate pricing accuracy. Net profit margin, or simply net margin, is the net sales over the revenue generated. Although gross profit margin, net profit margin, and operating are types of profits the company can produce, these metrics were explained in Chapter 4 and will not be reviewed here; they overlap both sections. This chapter discusses profit margin, EBITDA, and return on assets.

EBITDA is the overall ability of a company to generate profit from sales when fixed obligations such as taxes, depreciation, and amortization are considered. This is in the income statement. Return on assets shows how well a company turns its assets into money generated. All the profit metrics help determine how much money the company makes and, therefore, how well the company is managing its resources and how much profit the company could expect in the future.

Profit margin percent = (Revenue – Total expenses with the cost of goods)/Revenue*100

The profit margin indicates how a company is handling its finances, and, more specifically, it compares the profit to sales. Profit margin tells the company how many cents per dollar the company generated for each dollar in sales. In general, a company with a profit margin percent over 20 percent is considered good and below 5 percent is not doing well, but this ratio can vary by industry and size of the company, as well as by other factors.

On the spreadsheet, the profit margin percent stayed stable from 2xx0 (70 percent) to 2xx1 (70 percent). The margin is remaining stable, and it shows that the company is making a marked profit. This profit margin percent is a bit high for a real company, but a more attainable profit margin percent is around 50 percent or more.

EBITDA = Net income – (Interest, depreciation, and amortization)

EBITDA means net income before interest, depreciation, or amortization.

EBITDA is a measure of a company’s profitability or overall performance and may give a clearer view of a company’s operations. EBITDA is used to measure a company’s ability to generate a profit from sales. It is used sometimes in lieu of net income, also called net profit, and it does not include items of capital and financial expenditures, such as property, plants, and equipment. This metric adds back interest and tax expenses but excludes debt.

EBITDA is a measure that can be compared to other similar companies because it combines the core elements of a company’s profit.

Download

Copyright Disclaimer:
This site does not store any files on its server. We only index and link to content provided by other sites. Please contact the content providers to delete copyright contents if any and email us, we'll remove relevant links or contents immediately.