Lesson 4 - Profitability

• Profitability - is a business ability to gain profit from its business activities and investment.
• profitability - is a business ability to produce return on an investment based on its resources.
• to measure probability we use:

  • payback period
  • return on investment
  • return on sales
• payback period - refers to the allotted time, usually number of years that an investment is recovered. simply put this as the length of time an investment reaches a break even point.
• payback period - the length of time an investment reaches a break even point
• payback period formula

  • Initial Capital ÷ Profit
• return on investment (roi) - is a performance measure used to evaluate the efficiency of an investment or compare the efficiency of a number of different investments. the results are expressed as a percentage or ratio.
• return on investment (roi) - also called return on assets
• return on investment formula

  • net income ÷ cost of goods sold × 100
• return on sales (ros) - also called as net profit margin.
• return on sales (ros) - a financial ratio that shows how efficiently a company is able to regenerate operating profit from its revenue.
• return on sales (ros) - measures the overall operating results of an entity. the measure considers all income recognized and all expenses incurred during the period.
• return on sales formula

  • net income ÷ net sales × 100
• profit - is what is left of the business revenue, income or sales after it pays all expenses.
• directly related expense to revenue include:

  1. wages
  2. expenses and producing a product
  3. operating expenses
  4. debt-reduction expenses
  5. and other expenses related to the product of the business activities
• profit formula:

  • revenue or sales - expenses
• break-even - happens when there is no profit nor loss after deducting expenses from revenue.