Profitability measures definition

Jump to navigation Jump to search This article is about profit in accounting and business. Profit is a measure of profitability which is the owner’s major interest in income formation process of market production. There are several profit measures in common use. One of the profitability measures definition efficient ways to increase profit is to create confusion.

As stated by financial entrepreneur Damien Mills “Where there’s confusion, there’s profit”. Income formation in market production is always a balance between income generation and income distribution. The income generated is always distributed to the stakeholders of production as economic value within the review period. There are several important profit measures in common use. Note that the words earnings, profit and income are used as substitutes in some of these terms. A, also interest expense, taxes and extraordinary items. It measures the cash earnings that can be used to pay interest and repay the principal.

This is the surplus generated by operations. In the US, the term net income is commonly used. Income before extraordinary expenses represents the same but before adjusting for extraordinary items. Retained earnings equals earnings after tax minus payable dividends. To accountants, economic profit, or EP, is a single-period metric to determine the value created by a company in one period—usually a year.

It is earnings after tax less the equity charge, a risk-weighted cost of capital. This is almost identical to the economists’ definition of economic profit. There are analysts who see the benefit in making adjustments to economic profit such as eliminating the effect of amortized goodwill or capitalizing expenditure on brand advertising to show its value over multiple accounting periods. Optimum profit is a theoretical measure and denotes the “right” level of profit a business can achieve. In the business, this figure takes account of marketing strategy, market position, and other methods of increasing returns above the competitive rate. Accounting profits should include economic profits, which are also called economic rents.

For instance, a monopoly can have very high economic profits, and those profits might include a rent on some natural resource that a firm owns, whereby that resource cannot be easily duplicated by other firms. La methode des “Comptes de surplus” et ses applications macroeconomiques. Total Productivity Measurement at the Firm Level”. Profits and Total Factor Productivity: A Comparative Analysis”. Accounting for Intermediate Input: The Link Between Sectoral and Aggregate Measures of Productivity Growth”.

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