comment and reply on the two following sources
1. Profitability analysis “involves the allocation of expenses and analyzing profitability across several different dimensions or vantage points within the company.” (Belden, 2020). In my own words, profitability analysis is the analysis of the profits within a company, it allows those within the company to see how to better optimize their profits and see potential profits in the short and long term. Analysis is defined as “a detailed examination of anything complex in order to understand its nature or to determine its essential features” (Merriam-Webster, 2021).
A “company’s profitability in total is an easy number to calculate, profitability at detailed levels is tough because of the differing granularities in accounting activities. ” (Belden, 2020). Profitability analysis provides some important information to the company. The “lack of visibility into true profitability can have a host of negative effects on performance.” (Belden, 2020). Profitability analysis is also helpful when it comes to offering insight into the demographic of different market segments. There are three ways to determine the profitability of a company, margin/profitability ratios, break-even analyses, and returns on assets.
I do believe that profit analysis is important for many reasons. Analyzing profits can help to identify the most and least profitable customers that the business has, and which products and services are the least and most profitable. It can also help you see which sources of information have the most reliable facts relating to your business and/or industry. It also allows you to optimize the responses to clients ever-changing needs, improve products to maximize their profits, in both the short and long term, and identify and fix any decreasing profit margins.
2. Profitability analysis is the analysis of business factors such as cost and revenue to evaluate the performance of the business. This analysis is important to the owners, partners, and external investors of the business. The data from the analysis can help management and investors project the future performances of the company as well. The profitability analysis can help the business find out what business activities bring in profits for the company and which bring in loss. This information will provide management with authentic data to make informed decisions on the future activities and investments.
In doing profitability analysis, according to Scott (2020), the analysists used a couple of ratios, such as the Asset turnover ratio, the return on total assists, return on stockholder’s equity, earnings per share, price earnings ratio and dividends per share. These ratios can give the company good information on its business performance. For example, the asset turnover ratio can tell how much can be generated for every dollar of assets it employs. The return on total assets can tell how much net income can be generated by every dollar of assets it employs. The difference between the asset turnover ratio and the return on total assets is the management costs and other expenses of the company on every dollar and the goal is to bring these two numbers as close as possible so as to minimize management costs. Another good comparison of ratios is the return on stockholders’ equity, which tells how much is earned for every dollar invested and the return on total assets ratio. Since equity is part of the total assets, the differences of the ratios can reveal how much debts the company has. When the company has no debts, the return of equity (ROE) and the return on assets (ROA) will be the same. If a company is to study the effects of debts, then it needs to look at the differences between the two ratios.
In short, it is very important to analyze profitability because it can offer a concrete picture of the operations of the company, what makes money and what do not and can give guidance and projections of future operations and activities.