What is the évaluation of the profitability?

Evaluation of profitability is the way how any entity measures and analyzes its net earnings. There are some common parameters used for the evaluation of profitability like Return on assets, Return on Equity and most common Net Profits Margin earned by the entity. Evaluation can be done in two ways. Either internal benchmarks are used or relevant market sector result are used for comparison.

While we talk about evaluation of profitability, It must be evaluated according to the activity sector, regulatory implications and market conditions in which entity is performing. While evaluating, any abnormal gains or losses should be set aside because they will affect the true picture of profitability of the business.

First step is to calculate the basic ratios i.e. Net profits, Return on assets, Return on equity etc.

Second step is to set the internal benchmarks like increase from previous year etc.

Third Step is to gather data of the relevant sector to which entity belongs and compare it with the entity's results.

An important thing to remember is that the management can derive its own criteria to analyze the things. it is possible that the management is more focused on increase in units sale rather than increase in net profit ratio to get a better volume of business.