Measuring profitability

In earlier sections of the chapter the term profit has been used and in the present section a more detailed look will be taken at the ways in which profit is measured and the ways in which we can compare the profitability of investments. 

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Payback Period Another traditional method of measuring profitability is the payback period or fixed-capital-return period. Actually, this is really a measure not of profitability but of the time it takes for cash flows to recoup the original fixed-capital expenditure. 

Net Present Value measures profit but does not indicate how efficiently capital is being used. 

This debate on the correct way to measure profits raises the much wider issue of what is an acceptable level of profit. The British have answered this through their PPRS, which sets a profit range for the industry at 17-21 per cent based on sales of pharmaceuticals to the NHS (DoH 2003). The rational for using this is somewhat murky. What is a fair... 

Various ratios measure profits relative to investment and sales. Two important... 

Seventh, the investment in an expert system application must produce a payoff either in terms of improvement productivity or a measurable profit. Since expert system development requires a significant investment in terms of people and money, the expected return on that investment must be well understood, along with the means of measuring the return. 

One outside economist who specializes in the pharmaceutical industry submitted a detailed critique of the third draft of the profit study in July 1991. OTA asked Baber and Kang to reply to the critique. The entire file of comments and replies was then sent back to the two contract reviewers and the panel chair for a final review. These reviews convinced OTA that the methods employed by Baber and Kang to measure profitability in the industry are sound and represent an important advance over previous methods. OTA compiled the entire history of review for the profit study into a single document that is available upon request to interested parties. 

This model cannot be tested in its entirety too many model components remain either unmeasured or unmeasurable. For example, asymmetric information is not public information it is not measured. Profits and even costs are not imiformly reported for all companies, especially for small and medium-sized companies such as we have in our sample. However, there is one important category of cost—safety costs—which is measured in sufficient detail to use in testing our model. The test is simple do alternative HRM practices affect employees injury claims Do some HRM practices help reduce injury-claim fi equency Do other HRM practices help reduce injury-claim severity If they do reduce safety costs, is it because the HRM practices are improving technical efficiency or because HRM practices are reducing disability benefits consumption associated with as5mimetric information ... 

Historically the yardstick used to measure profitability has been the percent return on capital or percent return on investment. This is defined as... 

In Chapter 1 we discussed Collins s book Good to Great. We described the hedgehog concept, which was one of the two fnndamental steps in transformation to a great company. Part of this concept was the determination of what the company needed to measure. For example, it was critical to Walgreens to measure profit per customer visit, rather than profit per store or profit per territory. This was not a simple or trivial decision. Collins reported that companies took an average of three years to develop a successful hedgehog concept. 

As discussed in Sections 13.0 and 14.0, the management of operating expenditure (opex) is a major issue, since initial estimates of opex are often far exceeded in reality, and may threaten the profitability of a project. Within the FDP, it is therefore useful to specify the system which will be used to measure the opex. Without measuring opex, there is no chance of managing it. This will involve the joint effort of production operations, finance and accounting, and the development managers. 

Progress in the theoretical description of reaction rates in solution of course correlates strongly with that in other theoretical disciplines, in particular those which have profited most from the enonnous advances in computing power such as quantum chemistry and equilibrium as well as non-equilibrium statistical mechanics of liquid solutions where Monte Carlo and molecular dynamics simulations in many cases have taken on the traditional role of experunents, as they allow the detailed investigation of the influence of intra- and intemiolecular potential parameters on the microscopic dynamics not accessible to measurements in the laboratory. No attempt, however, will be made here to address these areas in more than a cursory way, and the interested reader is referred to the corresponding chapters of the encyclopedia. 

Finding the best solution when a large number of variables are involved is a fundamental engineering activity. The optimal solution is with respect to some critical resource, most often the cost (or profit) measured in doUars. For some problems, the optimum may be defined as, eg, minimum solvent recovery. The calculated variable that is maximized or minimized is called the objective or the objective function. 

Simplified Profitability Criteria. Approximate profitabihty criteria that do not require a detailed year-by-year financial analysis are sometimes employed as simple figure-of-merit measures. 

Profitability Diag rams. Profitabihty diagrams of the type shown in Figure 3a for Venture A provide insight into venture profitabihty. Total return rate is defined as the sum of the discount rate and the net return rate (NRR). The discount rate, net return rate, and total return rate are all shown on the diagram as functions of the discount rate. Because the NPV is a nonlinear function of the discount rate, the NRR and total return rate are also nonlinear. The NRR, as a measure of the profitabihty, correctly decreases as the discount rate increases. 

An ethylene plant contains more than 300 equipment items. Traditionally, operators were trained at the site alongside experienced co-workers. With the advent of modem computers, the plant operation can be simulated on a real-time basis, and the results displayed on monitors (107). Computers are used in a modem plant to control the entire operation, eg, they are used to control the heaters and the recovery section (108). A weU-controUed plant is much more profitable than a poorly controlled plant. For the heaters, a model-based control system is gaining importance (109). Instead of simply controlling the coil outlet temperature (COT), severity is actually controlled. The measurement of severity (either or C H /CH ratio) requires on-line effluent... 

Modern Measures of Profitability An investment in a manufacturing process must earn more than the cost of capital for it to be worthwhife. The larger the additional earnings, the more profitable... 

Analogous equations may be written for other additive measures of profitabihty such as net profit. 

If an option proves to be technically ineffective or inappropriate, it is deleted from the list of potential alternatives. Either follo ving or concurrent with the technical evaluation, an economic study is performed, weighing standard measures of profitability such as payback period, investment returns, and net present value. Many of these costs (or, more appropriately, cost saving may be substantial yet are difficult to quantify. (Refer to Economic Considerations Associated with Pollution Prevention.)... 

The Duns Financial Records Plus (DFR) database provides a balance sheet, income statement, and fourteen of the more widely used business ratios for measuring solvency, efficiency, and profitability. DFR also provides industiy norms and percentages that can be used to compare a toller s financial position to that of their... 

There are various indicators to determine the measure of profit for a process. In the following, we describe two of these indicators return on investment and payout period. The rate of return on investment (ROI) may be calculated as follows ... 

Cost Whether measurement or a computation technique is cheaper depends on the situation in question. In small and simple problems, it is usually more profitable to use measurement techniques. In large and complex problems, where parametric/sensitivity study is the objective, computation may be a better alternative. 

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