Profitability is the final measure of economic success achieved by a firm in relation to the capital invested in it. This economic success is determined by the magnitude of the net profit (Pimentel, Braga & Casa Nova, 2015). To achieve an appropriate return over the amount of risk accepted by the shareholders, is the main objective of firms operating in capitalist economies. After all, profit is the propulsive element of any investments in different projects. The assessment of profitability is usually done through the ROA (Return on Assets = Net Income/Total Assets) and ROE (Return on Equity = Net Income/Equity), which is the ultimate measure of economic success. Financial ratios are a class of financial metrics that are used to assess a business's ability to generate earnings as compared to its expenses and other relevant costs incurred during a specific period of time. For most of these ratios, having a higher value relative to a competitor's ratio or the same ratio from a previous period is indicative that the company is doing well.
The profitability of firms is of vital importance for investors, stakeholders and economy at large. For investors, the return on their investments is highly valuable and a well performing business can bring high and long-term returns for their investors. Furthermore, profitability of a firm will boost the income of its employees, bring better quality products for its customers, and have better environment friendly production units. Also, more profits will mean more future investments, which will generate employment opportunities and enhance the income of people. Profitability is the ability of a business to earn a profit. A profit is what is left of the revenue a business generates after it pays all expenses directly related to the generation of the revenue, such as producing a product, and other expenses related to the conduct of the business activities. Profitability is the primary goal of all businesses. Without profitability the business will not survive in the long run. So measuring current and past profitability and projecting future profitability is very important. Profitability is measured with income and expenses. Income is money generated from the activities of the business. Expenses are the cost of resources used up or consumed by the activities of the business.
Whether you are recording profitability for the past period or projecting profitability for the coming period, measuring profitability is the most important measure of the success of the business. A business that is not profitable cannot survive. Conversely, a business that is highly profitable has the ability to reward its owners with a large return on their investment. Increasing profitability is one of the most important tasks of the business managers. Managers constantly look for ways to change the business to improve profitability. A variety of profitability ratios (decision tool) can be used to assess the financial health of a business. These ratios, created from the income statement, can be compared with industry benchmarks. Also, income statement trends (decision tool) can be tracked over a period of years to identify emerging problems.
Profitability is seen as a measure of economic success achieved by a company in relation to the capital invested in it (Pimentel et al., 2005). To achieve an appropriate return over the amount of risk accepted by the shareholders, is the main objective of companies operating in capitalist economies. After all, profit is the propulsive element of any investments in different projects. The assessment of profitability is usually done through the ROA (Return on Assets = Net Income / Total Assets) and ROE (Return on Equity = Net Income / Equity), which is the ultimate measure of economic success.
In order to measure the profitability of a company, the most usual indicator is the return over equity (ROE), which is obtained by divided the net profit over the total shareholder‘s equity. However some of the companies in the studied sample had very small values for equity (sometimes even negative values), so in order to go around this problem the return over assets (ROA) could be used as a measure of profitability. This indicator is obtained by dividing the net profit of the period by the total assets of the company. Unlike the ROE the ROA is not a measure of firm‘s efficiency to generate profit from the invested capital, thus it cannot be used to compare the company‘s performance against other kinds of investments, such as bonds. Also ROA is not the best indicator in order to compare the performance of companies in different industries, since the scale factors and capital requirements may differ, however this ratio is good to compare the profitability between companies inside the same sector.
The ROA can be used on my research because all the companies of the sample operate in the same industry. Thus by analyzing the different ROA of the firms I will be able to verify if the profitability is in some way related to the liquidity levels. The ROE would not provide a good comparison because the small and the negative equity levels of some companies would generate distorted indicators of profitability. The ROA is calculated by dividing the net income of each period over the total assets of the companies. Since both numbers could be easily found on the financial statements on the annual reports it was hard to make a table with this ratio.
Deposit money banks (DMBs) are resident depository firms which have liabilities in the form of deposits payable on demand, transferable by cheque or otherwise usable for making payments (OECD, 2015). DMBs are financial intermediaries, providing funds for deficit sectors and collecting funds from surplus sectors. A key function of DMBs is to mobilize savings for investment. The importance of DMBs in influencing economic growth is widely acknowledged. Blum, Federmair, Fink and Haiss (2002) identify the role of DMBs in facilitating technological innovation through their intermediary roles. DMBs also ensure efficient allocation of savings through identification and funding of entrepreneurs with the best chances of successfully implementing innovative products and services.
