list and explain five different measures of profitability for divisional performance evaluation
When evaluating the profitability of divisions within a company, there are several measures that can be used. Here are five different measures of profitability for divisional performance evaluation:
1. Return on Investment (ROI): ROI measures the profitability of an investment by comparing the net profit generated to the total investment made. It is calculated by dividing the net profit by the total investment and multiplying by 100. ROI helps assess how effectively a division is utilizing its assets to generate profits.
2. Return on Equity (ROE): ROE focuses on the profitability of the division relative to its equity base. It is calculated by dividing the net income by the division's equity and multiplying by 100. ROE helps evaluate the division's ability to generate profits using the shareholders' investment.
3. Gross Profit Margin: Gross profit margin is the ratio of gross profit (revenue minus the cost of goods sold) to revenue. It indicates the percentage of revenue that remains after deducting direct costs associated with production. A high gross profit margin suggests effective cost management and pricing strategies.
4. Operating Profit Margin: Operating profit margin measures the profitability of a division's operations without considering interest and taxes. It is calculated by dividing the operating profit by revenue and multiplying by 100. It assesses the division's efficiency in managing costs and operations.
5. Net Profit Margin: Net profit margin captures the overall profitability of a division by considering all expenses, including interest and taxes. It is calculated by dividing the net profit by revenue and multiplying by 100. Net profit margin provides a holistic view of the division's profitability after considering all costs and expenses.
To calculate these profitability measures, you will need the division's financial statements, such as the income statement, balance sheet, and statement of cash flows. These financial statements can be obtained from the company's accounting records or financial reporting system. By analyzing the data, you can calculate each measure and compare divisions based on their profitability performance.