Cement Growth with Profitability Analysis
Every firm is most concerned with its profitability. One of the most frequently used tools of financial ratio analysis is “Profitability Ratios” which are used to determine the company’s bottom line and its return to its investors. Profitability measures are important to company managers and owners alike. If a small business has outside investors who have put their own money into the company, the primary owner certainly has to show profitability to those equity investors.
When doing a simple profitability ratio analysis, net profit margin is the most often margin ratio used. The Cash Flow Margin ratio is an important ratio as it expresses the relationship between cash generated from operations, and sales. It measures the ability of a firm to translate sales into cash.
Regularly reviewing the Return on Assets allows the measurement of the efficiency with which the company is managing its investment in assets and is using them to generate profit. It measures the amount of profit earned relative to the firm’s level of investment in total assets. The higher the percentage, the better, because that means the company is doing a good job using its assets to generate sales.
The Return on Equity ratio is perhaps the most important of all the financial ratios to investors in the company. It measures the return on the money the investors have put into the company. This is the ratio potential investors look at when deciding whether or not to invest in the company.
The temptation for many business owners to overlook reviewing the Profitability Ratios on a regular basis is strong because it is easy to be fooled that if the numbers at the bottom are in the “black” that the business is OK. Sometimes reviewing the figures more deeply can alert us to what we should be doing to cement future growth.
How often do you analyze your profitability?