Upon receiving a clinical exam, the patient is confronted with a series of unfamiliar terms. He doesn’t know what his cholesterol or blood sugar numbers mean, for example. Likewise, many entrepreneurs do not understand their profitability indicators.
Now imagine that this patient decided not to show his exams to the doctor. In doing so, he ignored the results and will not be able to make any decisions on his health, becoming vulnerable as a result.
This somewhat irresponsible decision is made by many companies that choose not to follow the key profitability indicators of their business. If you want to understand more about this topic, just read this article to the end!
1. Profitability indicators: margin index
This index is very important for entrepreneurs and for those who want to invest. Imagine that your company wants to attract investors to increase its area of operation. The problem is that your direct competitor wants the same thing.
In this example, the investor will analyze which company is able to bring in more profits, and to do so, he will look at the net and gross margin indexes of the companies.
To calculate the gross margin, the following calculation should be made:
Gross Margin = Gross Profit / Net Revenue
In this case, the investor will discover how much the company earned before paying its taxes, labor charges, etc.
The net margin, in turn, takes into account all these burdens. The calculation is as follows:
Net Margin = Net Income / Net Revenue
The higher the margin, the better the investment, because it means that the company profits more from invested capital.
EBITDA is an acronym in English that means Earnings before Interest, Taxes, Depreciation and Amortization. It is one of the most used profitability indicators, as it shows the operating profit of the company, revealing its cash flow potential.
Some entrepreneurs may ask themselves: “Why analyze an indicator that excludes so many factors that burden the company? Aren’t these factors part of the business?”
The negative result of a company can be caused by financial mistakes, such as contracting a loan. In this case, the entrepreneur who has a positive EBITDA, but a negative profit, does not have to abdicate his business. He should do a financial study or a review of indebtedness, for example.
3. Return on equity
This is the result of the net income divided by shareholders’ equity. Although it is a simple calculation, this is one of the profitability indicators that cannot be ignored.
Over time, a stable return on equity may indicate stagnation. But if this stable margin is accompanied by a shareholders’ equity and an increasing net income, it is a good sign for the company; after all, it shows that it is reinvesting capital and seeking improvement in its performance.
As we have seen in this article, it is very important to understand the profitability indicators of a company. However, this analysis process needs to be modernized. Your company cannot be held hostage by Excel spreadsheets.
Because of this, companies around the world are already using the solutions offered by MyABCM. Contact our specialists to understand how technology can improve your indicators.