Chapter 8 insight

The discussion on chapter eight is all about profitability, profitability measures or the ratios related to
profitability and its specific formulas. Profitability is important in firms’ operations, for stakeholders,
survival and success. If firms have the ability to use its resources properly or if they applied efficient
strategies to reduce costs, they may generate profit. As firms earn greater revenue and incur lesser
expenses it is an important sign that there will be more excess or profit. Ratios related to profitability are
important to determine whether the company is efficient and productive, and would benefit
stakeholders, more investors to attract, and an increase in capital and investments. By computing or
getting the percentage firms can easily determine if they had generated more earnings or incur loss and
needs actions or improvement in operations in order to have better revenue. In profitability measures or
analysis, only the income from main or normal operations are included because discontinued operations
and extraordinary items are not required in the computations. Some of the ratios are net profit margin,
total asset turnover, return on assets, operating income margin, operating asset turnover and others. For
example, net profit margin is also known as return on sales in which firms can easily determine
profitability if the percentage of profit is high as it is based on the amount of sales. Other ratios may vary,
from the formula, accounts included in the computation, amounts to exclude as well as the results but
these are all related in determining profitability of the firm and its success