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Profitability rates are specific financial metrics used for measuring the ability of a certain company to make a profit with regard to a range of parameters. Those parameters are the company’s operating costs, sales revenue, balance sheet assets, and shareholders’ equity. There exist two types of profitability ratios, in particular, margin and return ones. The former indicate the efficiency of transforming sales revenue into profits, meanwhile, the latter shows how profitable a business is for its owners as well as stakeholders (Black, 2020). In turn, each of the types comprises several subtypes that are variously meaningful for various sizes of a business and roles in it, for instance, owners or investors.
Profitability ratios enable comparing a business to the competitors, attracting new investors, and revealing the areas that require improvements. In terms of comparison, they allow a fuller picture of the overall profitability, as the sum of money earned is not necessarily a measure (Black, 2020). Meanwhile, presenting the profitability in a form of a percentage is considerably more visual, which can also help potential investors to see if the business is performing well. Owners or shareholders can rely upon the calculations as well in order to check whether everything is working properly. There is a higher chance to make a reasonable decision based on the outcomes.
Darius Green mentions in his discussion board post that profitability ratios can be compared to efficiency ratios that illustrate the effectiveness of the internal use of assets. He does not specify, however, which of the two classes of financial metrics is more informative for business owners, shareholders, and investors. Another question is for which preferred type of companies (small, medium or big business) the metrics are dedicated, and why.
Reference
Black, M. (2020). Profitability ratios: Types of profitability ratios and why they matter. Web.
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