Profitability indicators are relationships that connect profit with sales revenue and investments, and viewed as a whole, they show the company's efficiency and measure the company's ability to achieve a certain level of profit in relation to revenue, assets or capital.
The goal of the company's operations is to make a profit. Profitability indicators are considered one of the most important indicators in the financial analysis of a company. They give the user a quick insight into the entire business of the company. Likewise, they are very widespread when making decisions when financing a specific project or company. Looking from the aspect of analytical procedures in financial auditing, profitability indicators allow the auditor to quickly look at the blood picture of the subject being audited. The net profit margin is relevant only for short-term assessments and comparisons of those economic entities that are subject to the same principles of taxation.
Table 5: Profitability indicators, i.e. their calculation method
| POINTER NAME | NUMERATOR | DENOMINATOR |
| Profit margin before tax | Profit before tax | Total income |
| Return on Total Assets (ROA) | Profit before tax | Total assets |
| Return on total equity (ROE) | Net profit | Own capital |
- Pre-tax profit margin
The profit margin before taxation provides information that is particularly useful for comparing the realized margin in relation to other companies, excluding the influence of taxation policy. This can be very useful information in cases where the taxation policy is frequently changed in order to be able to compare the level of profit in different periods. For the overall assessment of the profitability of the company, it is important to introduce an indicator that gives us answers to the following questions: how much the planned investment pays off in relation to the earnings we make, and how much we could have made by investing in some other business (eg savings with fixed interest).
Gross profit margin relates profit before tax to total revenue and shows how much gross profit is made per unit of revenue. The above indicator is more referential for comparison, unlike the net profit margin, since the tax systems of countries and tax rates differ. It is desirable that the value of the indicator is as high as possible.
- Return (Profitability) on total assets (ROA - return on assets)
Return on total assets, i.e. the indicator of profitability of assets, is an indicator of the success of using assets in generating profit and refers to the profit that the company generates from one monetary unit of assets. The value of the asset return rate varies depending on the activity to which the company belongs, i.e. the lower the profit per monetary unit of assets, the higher the degree of asset intensity. Greater intensity of requests and more investment in business in order to achieve profit. The ROA indicator in the numerator can contain: operating profit or gross profit, for ease of calculation, gross profit will be used in the expression.
- Return (Profitability) on total capital (ROE – return on equity)
Return on total capital is one of the most significant indicators that shows how many monetary units of profit the company makes per unit of its own capital. It is desirable that the value of the indicator is as high as possible. It is relevant when compared with entrepreneurs within the group. ROE is obtained by comparing net profit with equity. It gives the investor an answer to what extent his investment has made a return, and it can be a guideline for the future investor, whether or not he will invest his own capital in the company.
