Profitability: Functions, Types & How to Calculate Completely!

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Profitability: Functions, Types & How to Calculate Completely!

To determine the efficiency of a business, one important element of concern is profitability. Profitability is one of the important indicators to evaluate a company’s performance in the world of business and investment.

This financial ratio analysis helps company leaders more easily assess the company’s efficiency in creating profits and distributing them to investors.

To better understand profitability, its benefits, types, formulas, and how to calculate it, check out the full review below!

What is Profitability?

Profitability is a financial metric used by investors and analysts to measure and evaluate a company’s ability to generate profits relative to its revenues, operating expenses, balance sheet assets, and shareholders’ equity over a period of time.

This ratio reflects how efficiently a company uses its assets to create profits and deliver value to shareholders.

Companies generally desire a higher ratio or value, indicating that the business is operating effectively, generating revenues, profits, and cash flows.

This ratio analysis becomes more useful when compared with similar companies or previous periods. Keep in mind that the higher the company’s profitability level, the better the team’s performance within it.

Definition of Profitability According to Experts

Quoting repository.stei.ac.id, the following are the definitions of profitability according to experts, including:

1. R. Agus Sartono (2010:122)

Profitability is the company’s ability to earn profits concerning sales, total assets, and capital.

2. Kasmir (2011:196)

The profitability ratio is a ratio used to assess the company’s ability to seek profit.

3. Susan Irawati (2006:58)

Profitability ratios are ratios used to measure the efficient use of company assets or the ability of a company to generate profits during a certain period (usually semiannual, quarterly, etc.) to evaluate the company’s ability to operate efficiently.

4. Mamdun M. Hanafi (2012: 81)

Profitability is a ratio that measures the company’s ability to generate profits at a certain level of sales, assets, and share capital.

5. Hery (2015: 227)

The profitability ratio describes the company’s ability to generate profits through all its capabilities and resources, including sales activities, assets, and capital use.

What are the Objectives and Benefits of Profitability?

Quoting gramedia.com, it is important to understand the objectives and benefits of profitability for the company, considering this aspect is very important in corporate financial accounting.

The following are some of the objectives of applying the profitability ratio calculation, namely:

Calculate the company’s profit income in an accounting period, analyzing the development of profits compared to the previous accounting period.
Assess the company’s ability to develop the capital from loans or own capital.
Calculate the company’s net profit after deducting taxes and own capital to evaluate the profit position obtained in the previous period.

In addition to the objectives, there are also several benefits obtained from the use of profitability ratios. The following are some of the benefits of calculating the profitability ratio applied by a company in achieving its goals, including:

Knowing the company’s profit calculation in a certain accounting period, as well as understanding the increase in the company’s profit value over time.
Assessing the company’s profit position this year and comparing it with the previous accounting period.
Knowing the amount of the company’s net profit after tax and evaluating the company’s productivity in managing capital to achieve profits and profits.

Get to Know the Profitability Function

Profitability is important in investment appraisal for investors, creditors, and banks. It allows them to evaluate the profit potential for investors and the extent to which the company can fulfill debt repayment obligations to creditors based on the use of assets and other resources.

Thus, the efficiency level of the company can be seen. The effectiveness and efficiency of management is reflected in the profits generated from the company’s sales and investments, as reflected in the elements of the financial statements.

The higher the ratio value, the better the company’s condition in terms of profitability. A high value reflects the company’s level of profit and efficiency, which can be seen from revenue and cash flow.

Profitability ratios provide important information that can be compared with previous periods and competitor ratios.

In addition, this ratio serves as a tool to evaluate the final results of financial policies and operational decisions taken by company management, which in turn can also affect the petty cash recording system.

What Are the Factors that Can Affect Profitability?

The type of company has a major impact on profitability. Companies that focus on selling consumer goods or services tend to have more stable profits than those that produce disposable goods. Some factors that affect profitability include;

Company Age: Companies that have been established for a long time tend to have more stable profits than newly established companies.
Economies of Scale: The economic size of a company can affect its profitability. Companies with large economies of scale have the potential to generate higher profits.
Production Costs: The production costs incurred by a company can affect its profitability. If the production costs are low, profitability tends to be higher and more stable than companies with high production costs.
Production Yield: The type of output a company produces also plays an important role. Companies that produce necessities tend to have more stable profits than companies that sell capital goods or products that may be less vital.

Types of Profitability Ratios

After understanding what profitability is and the factors that affect it, it is important to know the types of profitability.

Quoting idntimes.com, here are the types that need to be known, including:

1. Return on Assets Ratio

Return on Assets Ratio is a profitability ratio used to assess the percentage of profit the company earns based on its total resources or assets.

This ratio indicates the extent to which the company efficiently manages all its assets, reflected in the resulting percentage ratio.

Calculating Return on Assets is dividing the company’s net profit value by the total asset value; the result is multiplied by 100 percent. Thus, the Return on Assets Ratio value can be obtained as an indicator

2. Return on Equity Ratio

Return on Equity Ratio reflects the company’s ability to generate profits from all shareholder investments. This ratio provides an overview of the company’s ability by using a percentage as an indicator.

Calculating the Return on Equity Ratio is to consider the company’s total income that comes from the capital invested by the shareholders or the company.

The value generated by the Return on Equity Ratio reflects the extent to which the company successfully manages the capital invested by the shareholders.

Return on Equity Ratio provides information about the level of profitability that can be measured from the investment made by the owners of capital or company shares.

This ratio is an important tool to evaluate the company’s financial performance and success in generating profits from the capital invested by shareholders.

3. Return on Sales Ratio

In a corporate context, the Return on Sales Ratio reflects the profit earned after paying for all variable production costs.

This type of profitability is known as the return on sales ratio, where the variable production costs, such as workers’ salaries and production materials, have been reduced by taxes and debt interest.

This profitability ratio provides an in-depth look at the profit earned per pound of sales, also known as the operating or operating income margin.

The way to calculate Return on Sales is to divide profit before deducting taxes and interest by sales revenue, and then the result is multiplied by 100 percent.

Return on Sales Ratio is an important tool to evaluate a company’s operational efficiency and provides a detailed view of the level of profit generated from each unit of sales.

4. Return on Capital Employed (ROCE)

Return on Capital Employed (ROCE) is a profitability ratio that measures the company’s profit level from the capital used, expressed as a percentage.

Capital includes the company’s securities plus non-current liabilities minus current liabilities. ROCE reflects the efficiency of using the company’s capital and investments.

Calculating ROCE is by dividing profit before tax and interest on debt by total assets, which are then reduced by liabilities. The result is expressed as a percentage.

ROCE is an important indicator to evaluate the extent to which the company can generate optimal returns on invested capital. This ratio provides an overview of the efficiency of the use of capital by the company in generating profits.

5. Return on Investment (ROI)

Return on Investment or ROI is a profitability ratio used to calculate net income after deducting taxes against total assets.

The main function of ROI is to measure the company’s overall ability to generate profits from the total assets available.

ROI provides an overview of the company’s effectiveness in managing its investment and generating profits from the number of assets owned.

The high profitability ratio indicates that the company is in good condition, and able to optimize the use of assets to achieve net profit.

Profitability Example

Quoting online-pajak.com, here are some examples of profitability to know, including:

1. Gross Profit Margin (GPM)

Gross profit margin (GPM) is a profitability ratio used to evaluate the percentage of gross profit from total sales revenue.

Gross profit, reflected in the cash flow statement, indicates the profit earned by the company considering the costs incurred to produce products or services.

GPM helps measure efficiency in determining the cost of goods or production costs. The higher the GPM, the better the business operations.

Conversely, if the GPM is low, it can indicate a problem in financial management for the company’s operational activities. Here is the formula and example of GPM calculation:

(Gross Profit / Total Revenue) x 100%

Case Example:

Gross Profit of Company A: Rp50,000,000
Total Revenue: Rp57,000,000

Then, Company A’s GPM is calculated as follows:

(Gross Profit / Total Revenue) x 100%

= (Rp50.000.000 / Rp57.000.000) x 100%

= 87%

2. Profit Margin Ratio (PMR)

Profit margin ratio, also known as Net Profit Margin (NPM), is a profitability ratio used to assess the percentage of net profit after tax to revenue generated from sales. NPM can be calculated using the following formula:

NPM = Net Profit After Tax / Sales

For example:

Net Sales Revenue = Rp30,073,410,000
Net Profit After Tax = Rp5,074,750,000

Then, the NPM value is calculated as follows:

NPM = Rp5.074.750.000 / Rp30.073.410.000

NPM = 16,9%

3. Return on Assets Ratio (ROA)

The return on assets (ROA) ratio provides an overview of a company’s efficiency in managing its assets. The ROA formula is as follows:

ROA = Net Income / Total Assets

For example:

Net Income of Company C: Rp200,000,000
Total Assets: Rp40,000,000

Then, the company’s ROA is calculated as follows:

ROA = Rp200.000.000 / Rp40.000.000 = 5%

4. Return on Equity Ratio (ROE)

ROE is a profitability ratio that is useful for assessing a company’s ability to generate profits from the investment of the company’s shareholders, expressed as a percentage.

ROE reflects how successfully the company manages capital by measuring the profit generated from the investment of capital owners or shareholders. In addition, ROE (Return on Equity) is also known as own capital profitability or operating profitability.

The calculation of ROE involves the company’s net income and the capital invested by the company’s owners, including preferred and common shareholders.

Here is the formula and calculation example:

ROE = Net Profit After Tax : Shareholders’ Equity

From the financial statements published on December 31, 2020, PT. B, which operates in the construction sector, had a net profit after tax of Rp700,000,000. The total shareholders’ equity is Rp1,000,000,000. Therefore, the ROE is calculated as follows:

ROE = Rp700.000.000 / Rp1.000.000.000

ROE = 70%

5. Return on Sales Ratio (ROS)

ROS is a profitability ratio that describes the company’s profit level after payment of variable production costs, such as employee salaries, raw materials, and so on, before deducting taxes and interest.

This ratio shows how much profit each sales fund earns, also known as the operating or operating income margin. Here is the formula and example of ROS calculation:

ROS = (Profit before tax and interest / sales) x 100%

For example:

PT D generated a profit before tax and interest of Rp300,000,000.
Sales amounted to Rp2,000,000,000

Then, the ROS value is calculated as follows:

ROS = (Rp300.000.000 / Rp2.000.000.000) x 100%

ROS = 15%

The Difference between Profitability and Profit

Besides the term profitability, the financial world recognizes another similar-sounding term: profit. Although at first glance, they look similar, they have different meanings.

Profitability refers to the ability of a business to generate profits. Meanwhile, profit refers to the profit generated by a business after all costs and expenses are deducted from revenue.

In simple terms, profit is the positive difference between revenue and costs, often called profit. On the other hand, profitability is a company’s ability to earn profits.

In investment, profitability can relate to crypto assets such as Bitcoin. Profitability in Bitcoin investment is related to Bitcoin mining or crypto mining as an activity to profit from the most popular crypto asset.

Introducing Profitability Factors in Crypto Mining

Quoting d-central.tech, the profitability from crypto mining depends on a delicate balance of several factors.

A detailed examination of these elements is critical to understanding the potential success of a mining operation. Here are the factors that affect the profitability of crypto mining:

Hardware Efficiency: Mining hardware efficiency, measured in terms of hash rate and energy consumption, directly affects profitability. More efficient hardware can process more transactions with less energy, reducing operational costs.
Electricity Costs: As mining is energy-intensive, the cost of electricity is an important factor. Operations in areas with lower electricity costs have a competitive advantage.
Network Difficulty: The difficulty of cryptographic puzzles in the mining process adapts over time. As more miners join the network, the difficulty increases, requiring higher computing power to mine the same amount of crypto assets.
Crypto Asset Price: The market value of the crypto asset being mined is perhaps the most volatile factor. High market prices can lead to significant profits, but dips in the market can quickly erode profitability.

In short, the profitability of cryptocurrency mining is influenced by a complex combination of technological efficiency, operational costs, market dynamics, and innovative strategies.

Successful crypto mining operations are often the result of meticulous planning, constant adaptation to market trends, and utilization of technological advancements.

Companies aspiring to enter this space should thoroughly analyze these factors to assess the potential profitability of their mining efforts.

Tools to Calculate Bitcoin Mining Profitability

Quoting doubloin.com, some tools will make it easier for us to calculate the profitability of Bitcoin mining, including:

Profitability Calculators

Calculating the profitability of Bitcoin mining can be tricky, but it can be made easier with the help of a profitability calculator.

This helpful web-based tool can determine how much we should expect to earn from Bitcoin mining.

Here are a few things to keep in mind when using a profitability calculator:

Profitability calculators consider network hashrate, block reward, power consumption, and difficulty level.
The most popular profitability calculators include WhatToMine, CryptoCompare, and CoinWarz.
We must enter information about the mining hardware, such as hashrate and power consumption.
Some profitability calculators allow us to factor in other costs, such as electricity and pool fees.
When using profitability calculators, it’s important to remember that these are just estimates based on current conditions. Actual earnings may vary depending on market changes or the difficulty level.

A profitability calculator can be a useful tool for calculating Bitcoin mining profitability. However, it should only be used as a starting point for calculations. We also need to consider hardware and ongoing costs before deciding if mining is right for us.

QuickMiner

QuickMiner is a software that allows us to optimize mining operations by automatically selecting the most profitable crypto assets to mine.

It helps miners save time and maximize their profits by considering various factors such as network difficulty, market price, and block reward.

With QuickMiner, we can select coins to mine based on profitability without constantly monitoring various crypto markets.

This tool is very useful for managing energy costs and making smart decisions regarding hardware investments and mining strategies.

Tips for Calculating Bitcoin Mining

To calculate Bitcoin mining, there are several tips that miners need to pay attention to. Quoting doubloin.com, here are some tips:

Calculating Profitability over Time

One of the keys to success in Bitcoin mining is calculating profitability over time. This means looking beyond short-term profits and thinking about long-term gains.

To do so, we need to consider both sources of income and expenses over time. With that information, we can create a solid plan to maximize revenue while minimizing costs.

Resetting this plan regularly as market conditions change will be essential to maintaining profitability in the long run.

Analyzing Market Conditions

In cryptocurrency mining, market conditions play an important role in determining profitability. As the price of Bitcoin and other crypto assets fluctuates, it becomes important to analyze market trends to stay ahead.

Keeping an eye on news that might affect the price of crypto assets is essential to anticipate potential changes in profitability.

In addition, it is also important to pay attention to fluctuations in difficulty levels when calculating mining rewards, as higher difficulty levels will result in mining fewer Bitcoins each day.

One way to mitigate this risk is to diversify mining operations with different crypto assets, such as Litecoin (LTC), which is less difficult than Bitcoin.

Developing a Robust Mining Strategy

Developing a solid mining strategy is essential in maximizing Bitcoin mining profitability. This includes carefully considering hardware options, energy costs, and the current state of the market.

It is important to regularly adjust the strategy based on changes in network difficulty and Bitcoin price.

One effective approach is diversifying mining operations by joining multiple mining pools or even exploring mining other crypto assets, such as LTC mining.

Contingency planning can help mitigate risks associated with unexpected expenses or market crashes.

Contingency Planning

Preparing a contingency plan is essential when calculating Bitcoin mining profitability. Cryptocurrency markets can be highly unpredictable, and unexpected events such as fluctuations in network hash rate or a sudden drop in Bitcoin price can significantly affect profits.

Some key elements of a good contingency plan include, among others, diversifying mining operations across different crypto assets or pools and establishing an emergency fund for unexpected expenses.

Also, being able to regularly monitor and adjust strategies based on market trends and profitability calculators, as well as staying on top of the latest developments in the industry.

Conclusion

In conclusion, profitability or profitability ratios are financial metrics used by investors and analysts to measure and evaluate the ability of a company.

Among other things, it generates profits relative to its revenues, operating expenses, balance sheet assets, and shareholders’ equity over a period of time.

In managing a company’s finances, understanding the purpose and benefits of profitability is very important.

The application of profitability ratio calculations has several main objectives, including measuring the company’s profit income in a certain period, assessing the company’s ability to develop capital, and calculating net income after tax and own capital.

In addition to these objectives, using profitability ratios provides various benefits for companies.

These benefits include understanding the calculation of the company’s profit in a certain period, evaluating the increase in profit value over time, and assessing the profit position this year compared to the previous period.

Including an understanding of the amount of net profit after tax and evaluating the company’s productivity in managing capital to achieve profits and profits.

Thus, using profitability ratios is important in achieving goals and improving the company’s financial performance.

You can also read other interesting articles, such as how to calculate ROI on INDODAX Academy articles.

To broaden your understanding of blockchain technology, you are strongly encouraged to read the latest articles on INDODAX Academy.

INDODAX Academy presents a variety of materials ranging from basic concepts to more in-depth aspects related to blockchain technology.

By reading the articles on INDODAX Academy, you will understand this technology more deeply, including its application and the latest information about the crypto world.

Later, after understanding and getting the latest information related to crypto assets, you can start investing in crypto with INDODAX.

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