Want to better understand what is profitability in investments and how to calculate the return on investments? Check out our tips!
Knowing profitabilitys well means one would get a holistic view of one’s business. From it, one can compute for a return on investments made while considering the company’s net profit.
Although it may seem complicated, as you read on to this content, you will realize that it is actually simple. In the following post, we explain exactly what profitability is how to calculate it and which are its types. Stay tuned!
What is profitability?
Profitabilitys is nothing more than the percentage of a value obtained from a certain amount of money invested in a certain segment, in other words, it means the return on an investment. It can also be referred to as an economic advantage obtained by a company that offers goods and services.
More information about your business will also tell you if it’s profitable enough to continue. You will know whether you are running a loss-making business or gathering debts.
This is the most important criteria for the development of a company, as it allows us to understand the possibility of investing in constant innovation and the search for more space in the market. For investors, it allows us to understand expectations regarding investment made and if this percentage will meet our planning.
Now that you have a good understanding of the concept of profitability, we will explain below how this indicator works for a company and for investors.
What is profitability in companies?
Profitability in companies allows us to assess their profit margin . This indicates how much money the company is accumulating through the execution of its activities. This indicator is very important to clearly indicate the strategies that should be adopted by the company for its expansion or decline in the market .
Its main function is to measure the potential that a business has to pay for itself based on the investment made in its purchase or structuring. Monitoring this indicator can also predict, in some cases, cash flow problems.
Monitoring a company’s profitability offers the opportunity to assess whether the business is providing attractive rewards and, from there, enables important management decisions to be made, such as:
- change the management system;
- develop strategies to increase sales or profit margins;
- cut costs;
- invest in opening new units
- or even opt to sell the business.
To calculate the profitability of your business , simply divide the company’s profit in a predetermined period by the value of your investment or its current market value. The result in percentage will translate the profitability of your business in the equivalent period.
Take as an example a company with an initial investment of R$50,000.00 and its net profit in 12 months is R$2,500.00.
Calculation:
R$ 2500,00 / R$ 50.000,00 = 0,05 X 100 = 5%
This means that the annual profitability of this company is 5%.
What is profitability in investments?
The profitability of investments demonstrates your ability to generate profits through investments in government bonds, fixed income securities, direct treasury, stock exchange shares, savings accounts, etc.
Expressed as a percentage, return on investment is able to measure the income or loss generated by an investment in relation to the amount of money invested.
For example, if you invest $1000 in shares on the stock exchange and after a certain amount of time you recover that amount in R$1800 , it means that there was a return on your investment which, in this case, was 80% of the amount invested.
To obtain a real calculation of the profitability of your investment, it is necessary to take into account some factors that can ultimately directly influence the results. These elements are taxes, administrative fees and inflation during the period.
This way we obtain the following formula:
(yield – influencing factors) x 100 / amount invested = profitability
Before investing your money, it is very important to know your profile as an investor, the types of investments and compare the profitability between the options, to then determine which is most appropriate for your goals.
Comparing returns is recommended to ensure a more solid and reliable investment. Learn about the main types below.
What are the types of profitability?
Depending on the type of investment, it is possible to obtain different forms of profitability. Some, in turn, provide a precise margin of safety during investments. Check out the main types below.
- Prefixed
- Post-fixed
- Hybrid
- Variable
Prefixed
This type of return provides a fixed percentage of return on investment. In this case, the investor can estimate the final profitability of their investment in a given period.
Post-fixed
This modality, unlike the prefixed one, follows some market rates, for example the Selic rate.
In this case, if this rate rises, profitability also rises, and if it declines, profitability follows suit.
Hybrid
The hybrid rate is a mix of the two previous rates. The return on investment compensates for the purchase with a fixed rate for the period and takes into account a joint economic factor, which in most cases uses the IPCA index. In this way, it is possible to obtain a good real return.
Variable
Variable profitability is a type of gain in which the prior return on investment is not known, that is, the return on investment is not measured at the time of application.
What is the difference between profitability and income?
Although similar, these two words have very different concepts in the world of finance. Yield is part of the concept of profitability, as the definition of the latter can be understood in three aspects.
This means that profitability on investments needs to take into account gross, net, real and nominal income, namely:
- Gross income: amount obtained from an investment without considering tax discounts, fees, etc.;
- net income: profits achieved in an operation after deducting costs;
- real yield: is the profitability of the investment according to the inflation of the period;
- nominal income: values achieved without taking into account inflation variations.
For better profitability in business, you need to have good returns. The longer you leave your money invested , the higher your profitability and income will be, but you should be aware of the influences of inflation and other factors on its value in certain periods.