Economic profitability

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La rentabilidad económica es un concepto muy relacionado con las compañías. Para este caso, además se conoce como ROI, acrónimo de Return on Investmet. Se refiere a profit that a company or business obtains for having invested. In other words, we are talking about the ability of a company to, through the investments it makes, make a profit without having to apply for financing.

Now, you must pay attention that this benefit is obtained before deducting interest and taxes, in such a way that the final benefit may be less, or even not be. This is why it is essential to pay attention to this concept, but also others related to it that offer more information.

To calculate the economic profitability the following formula is used:

Economic profitability = (BAII / Total assets) x 100

For this case, the BAII is the gross profit, before applying interest and taxes, in other words, what the company obtains before deducting expenses, taxes and interests. And total assets are all the assets a company has, not just yours.

Economic and financial profitability

Even though many may consider that the economic and financial profitability is the same, the truth is that they are two absolutely different terms.

This is why we show you the two concepts so that you realize what the differences are between them.

As we have spoken before, the economic return is the "gross" benefits that are obtained after an investment without any type of financing involved.

For its part, financial profit, It is also known by its acronym ROE, which stands for Return on Capital. We are talking about an indicator that what it does is measure net profit with the funds and capital of a company or business. In other words, it seeks to measure the viability of the company towards its partners, since what it tries to do is to know what each person earns based on their funds and capital.

In accordance with the above, the main differences between economic and financial profitability would be the following:

At economic profitability all assets are taken into accountIn other words, all the company's resources, its own or that of others. However, in the case of financial profitability, only own resources prevail.

There may be a disparity between the two returns. In other words, as an example, economic profitability is positive while financial profitability results in a negative number. It is not that the accounts are wrong, but it does have to do with the above.

If we take into account the formulas, we talk about the ROI being calculated differently from the ROE. Thus, while the ROE divides the net benefits by the equity, in the ROI (Economic Return) it divides the total assets, at the same time that the benefits are not recorded net but gross.

Indicators that measure profitability

Economic profitability is in fact one of the indicators most used by companies to know the ability you have to make a profit. But it is not the only indicator that can be used to measure profitability. Actually, there are others who can give more information about it, as an example:

• Net profitability indicator. It offers a more "real" view, since it is based on net profit, but at the same time uses total assets, with which the funds are both its own and that of others.
• Gross margin indicator. For this case, you are looking to determine a relationship between gross margin and sales.
• Operating profit margin. Also in sales, try to establish the difference between the profit of the sales and the sales itself.
• Financial benefit. Where net profits and equity (assets) are taken into account.

How to increase the economic profitability of a company

Once you know this term, the most important question to ask yourself is how to increase the profitability of a business.

It must be made clear that this is not easy to obtain, but neither is it impossible. Therefore, below we leave you a series of tips that can help you increase the ROI of your business to achieve a greater gross profit that thus increases the net.

• Increase the price of your products. Yes, we know that it is something very risky, but you need to be able to achieve a greater profit through the products. You should not think about a strong raise either, sometimes, with just a few cents, you get good results. In reality, it is a practice carried out by many companies, such as supermarkets, which tend to raise the prices of some products several times a year. They do it at the very least, for pennies, but gross sales are up very positively.
• Reduces production costs. In case you do not want to raise the price of the products, because it may imply that you are not going to market what you should, another alternative is to lower production costs, in other words, try to make those products cheaper to have a greater margin profit.
• Lower the price of products. Sí, como antes te hemos aconsejado subir el precio, otra medida que puede aumentar la rentabilidad económica de una compañía es bajarla. De esta dinámica, lo que se pretende es que exista un aumento en las unidades de venta que implique un mayor beneficio pese a que el precio be más barato (debido a que se venderán más).