Analyzing the profitability of an Organization
Analyzing the profitability of a company is a major part of financial statement analysis. All financial statements are pertinent to profitability analysis but none is more important than the income statement. The income statements reports the company’s operating results over a period of time. Operating results are the primary purpose of a company, and play an important role in determining company value, solvency and liquidity. Profitability analysis is critically important for all users but especially for equity investors and creditors. For equity investors, income is often the single most important determinant of changes in security values. For creditors, income and operating cash flows are common and desirable sources of interest and principal repayments.
Factors in measuring company income
- Estimation Issues;
Income measurement depends on estimates of the outcome of future events. These estimates are a matter of judgment and probabilities. They require allocation of revenues and expenses across current and future periods. They involve determining future usefulness of many asset types and estimation of future liabilities and obligations.
- Accounting Methods;
Accounting standards governing income measurement are the result of professional experience regulatory agendas, business happenings and other social influences. They reflect a balance in these factors, including compromises on differing interests and views toward profitability analysis.
Two-phase Analysis of Income
- Analysis of accounting and its measurement: this requires an understanding of the accounting for revenue and expenses. It also requires an understanding of accounting for assets and liabilities since many assets reflect costs deferred and some liabilities represent deferred income.
- Applying analysis tools to income and interpreting the analytical results: Applying analysis tools is aimed at achieving our respective objectives in analyzing income. These objectives include income forecasting, assessing income persistence and quality and estimating earning power.
Analyzing the profitability of an organization is an important area of the finance department. There are several methods also for analyzing the profitability like income statement preparation where income and expenses during a period of time for the entire business. Budgeting is also an important tool of analyzing the profitability. Experts at Emirates Chartered Accountants Group are much familiar with the profitability analysis. For any enquiries reach us at email@example.com