explain five different measures of profitability for divisional performance evaluation
When evaluating the performance of divisions within a company, there are several measures of profitability that can be used. Here are five commonly used measures:
1. Net Profit Margin: This measure determines the proportion of revenue that remains as profit after all expenses have been deducted. It is calculated by dividing net profit by revenue and multiplying the result by 100. A higher net profit margin indicates greater profitability.
2. Return on Investment (ROI): ROI measures the profitability of an investment and reflects the division's ability to generate returns from the assets employed. It is calculated by dividing the division's net profit by the division's average invested capital and multiplying by 100. A higher ROI indicates more efficient use of resources.
3. Return on Assets (ROA): ROA evaluates the division's ability to generate profits using its total assets. This measure is calculated by dividing net profit by average total assets and multiplying by 100. A higher ROA indicates better asset utilization and profitability.
4. Gross Profit Margin: This measure represents the proportion of revenue left after subtracting the cost of goods sold (COGS). It is calculated by dividing gross profit by revenue and multiplying by 100. A higher gross profit margin suggests better control over costs and pricing power.
5. Operating Profit Margin: This measure assesses the proportion of revenue that remains after subtracting both COGS and operating expenses. It is calculated by dividing operating profit by revenue and multiplying by 100. A higher operating profit margin indicates effective cost management and operational efficiency.
To calculate these profitability measures, you will need the financial statements of the division, including the income statement and balance sheet. Ensure that the relevant data (such as revenue, expenses, assets, and liabilities) is accurate and up to date. Once you have the necessary information, you can use the formulas provided above to calculate each measure and assess the division's profitability.