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What are profitability and productivity in the company?

Table of contents:

Anonim

Profitability is the relationship between profit and investment, while productivity is the relationship between what is produced and what is consumed to produce it.

Cost effectiveness

Profit obtained from an investment or in the management of a company. It is important to note that there is no single measure of profitability.

In the evaluation of investment projects, the two most important profitability measures are the net present value and the internal rate of return. The net present value is an amount of money equivalent to the sum of the net income flows that the investment will generate in the future, expressed in the currency of a period generally determined at the time the investment is made. These money flows are updated using an investment equivalent discount rate, or equivalent to the market interest rate. The internal rate of return is the rate that, when used to discount future flows of net income, makes the net present value of the investment equal to zero. Normally the internal rate of return is compared to the market interest rate.

In the evaluation of the management of a company there is also no single indicator of profitability. The most widely used profitability indices constitute a measure of the company's operating efficiency, and are of two types; those that show profitability in relation to sales volume, and those that show profitability in relation to investment.

Among the former, we can mention the percentage of gross profit, which is equal to gross profit divided by total sales; and the net profit margin, which is equal to the net profit divided by the total sales. Among the profitability indices with respect to the investment, it is possible to cite the percentage of return on equity, which is equal to net income divided by total equity; or the percentage of return on assets. which is equal to net income divided by total tangible assets.

However, none of the aforementioned indices are useful by themselves, being necessary to have a set of them to make comparisons that allow evaluating the profitability of the management of the company.

Professor Sergio García, from the School of Business and Management, explains through the following video lesson what the economic and financial profitability of the company consists of.

Productivity

Relationship between the quantity of product obtained and a given quantity of inputs or productive factors. Productivity can be calculated with respect to a particular productive factor, a productive unit or an economic activity. A factor is said to be more productive when a greater volume of production is obtained with the same amount of factor used. A productive unit or economic activity will be more productive when a greater quantity of product can be obtained with the same production cost. However, the concept of productivity must be defined more precisely when applied to a specific problem. Thus, it is possible to distinguish between marginal productivity and average productivity. The first refers to increases in total production when the amount of a factor used increases by one unit,On the other hand, the second refers to the amount of product that each unit of the productive factor produces on average.

In the following series of videos, Professor Juan Carlos Vergara explains in greater depth the concept of productivity in the company and also presents others such as: partial productivity, total productivity, total factor productivity, factors that increase or decrease productivity and how it affects productivity over profit. Very useful resource to continue learning.

More about productivity in: Theory of labor and business productivity

Source: Sepúlveda L., César. Dictionary of Economic Terms. Editorial Universitaria, 1995.

What are profitability and productivity in the company?