Profitability Essay

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Profitability
According to Bowels, Edwards and Roosevelt(2005), profit is what is left from the sales revenue after the payment of goods and materials, wear and tear of machines and wages have been paid. They also stated that rate of profit is the total amount of profit earned decided by the value of capital goods owned by a firm and hence profit rate helps in determining the degree of success by achieved by firm which is helpful in making comparisons even between large and small firms. Ive and Gruneberg(2000)defined profit margin as the profit(P) per £ of sale and profitability or rate of profit or return on capital employed(ROCE) is the mass of profit divided by the capital owned(K) where mass of profit is total profit in £s.
    ROCE=(P/T)(T/K)=P/K where, T-sales.                                                                                       Eqn1.
As an economic concept, it is the difference between a firm's total revenue and all costs, including normal profit(which includes the opportunity costs) (Carbaugh, 2006) whereas, as an accounting concept, profit can be considered to be the difference between the purchase price and the costs of bringing to market different goods and services including the costs of components , operating costs etc(http://en.wikipedia.org/wiki/Profit_(economics)). Accounting profits include economic profits. In a perfectly competitive market in long run, economic profit does not occur and hence it is a concept in short run. Moreover this concept of economic profit is more prevalent in uncompetitive market (http://en.wikipedia.org/wiki/Profit_(accounting)). Operating profit which is one of the concepts in accounting profit can be seen improving if profitability is growing faster than the growth in sales which can be due to lower expenditure or higher rate of profit where as if it is gross profit improving, it may be due to change in market or mix of product or an increase in selling prices(Collier, 2010).  
Profitability depends...

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