# Profitability Ratios, Definition, Objectives, Benefits and Types

Navigasi - The main attraction for company owners (shareholders) in a company is profitability. In this case, profitability means the results obtained through the management's efforts on the funds invested by the owner of the company.

Profitability Ratios, Definition, Objectives, Benefits and Types |

According to Sofyan Syafari Harahap (2016:304) that the definition of profitability is as follows: "The ratio of profitability or called profitability describes the company's ability to earn profits through all of the company's ability to earn profits through all capabilities, and existing sources such as sales activities, cash, capital, total employees, number of branches and so on. The ratio that describes the company's ability to generate profits is also called the operating ratio.

According to V.Wiratnna Sujarweni (2017:64) has defined that: "Profitability and profitability ratios, this ratio is used to measure the level of rewards or gains (profits) compared to sales or assets, measuring how much the company's ability to earn profits in relation to sales, assets as well as profits and own capital”.

So from several expert opinions it can be concluded that profitability is the company's ability to earn profits through the company's ability to increase sales, capital, and employee performance. The use of ratios is used to describe the characteristics related to the efficiency of the company. The better the financial performance of a company, the company has the financial ability to include its sales strategy.

#### Profitability Ratio Objectives and Benefits

Profitability ratios have goals and benefits, not only for business owners or management, but also for parties outside the company, especially parties who have a relationship or interest with the company. (Kashmir, 2016:197)

The purpose of using the profitability ratio for the company and for parties outside the company, namely:

- To measure or calculate the profit earned by the company in a certain period
- To assess the company's profit position in the previous year with the current year
- To assess profit development over time.
- To assess the amount of net profit after tax with own capital
- and To measure the productivity of all company funds used both loan capital and own capital.

Meanwhile, the benefits of profitability are as follows:

- To find out the level of profit earned by the company in a period
- Knowing the company's profit position in the previous year with the current year
- Knowing the profit development from time to time
- Knowing the amount of net profit after tax with own capital
- Knowing the productivity of all company funds used both loan capital and own capital.

### Types of Profitability Ratios

In accordance with the objectives to be achieved, there are several types of profitability ratios that can be used. Each type of profitability ratio is used to assess and measure the company's financial position in a certain period or for several periods (Kasmir, 2014:198)

In practice, the types of profitability ratios that can be used are:

**Gross Profit Margin (Gross Profit Margin)**

Comparison between net sales minus the cost of goods sold with the level of sales, this ratio uses the gross profit that can be achieved from the number of sales. This ratio can be calculated using a formula. (V.Wiratna Sujarweni, 2017:64 )

**Net Profit Margin ( (Net Profit Margin)**

Is a ratio used to measure net profit after tax and then compared with sales volume. This ratio can be calculated using a formula. (V.Wiratna Sujarweni, 2017:64)

**Rate of return an total asset/ROA (Earning Power of Total Investment)**

Is a ratio used to measure the ability of capital invested in overall assets to generate total assets to generate net profits. (V.Wiratna Sujarweni, 2017:65)

The percentage change in the level of asset taking (ROA) is a financial ratio that measures the company's ability to generate net income below a certain level of assets, knowing this ratio will be able to determine whether the company has indicators to see the company's business prospects. (Khasanah and Nahumury 2013)

Rate of Return for the owners/ROE
To measure the ability of own capital to measure the ability of own capital to generate profits for all shareholders, both ordinary shares and preferred shares. This ratio can be calculated using a formula. V.Wiratna Sujarweni (2017:65)

**Operating Profit Margin**

Operating profit before interest and taxes generated by each dollar of sales. This ratio can be calculated using a formula. (V.Wiratna Sujarweni, 2017:65)

**Operating Ratio**

Operating costs per dollar of sales. This ratio can be calculated using a formula. (V.Wiratna Sujarweni, 2017:65)

**Rate or return on investment/ROI**

The ability of the capital invested in overall assets to generate net profits. This ratio can be calculated using a formula. (V.Wiratna Sujarweni, 2017:66)