Data required for the income statement
In order to carry out a profitability analysis, data from the company's financial statements, in particular the income statement, are essential. It is this data that allows us to accurately visualise how the company generates a financial result in a given period, whether it is a profit or a loss.
Profitability indicators
Profitability indicators , also known as profitability or return ratios, allow determining the relationship between profit and capital and an accurate estimate of the company's profitability in specific areas. These indicators also help to illustrate the company's ability to generate profits and the ability to effectively invest new capital.
How to perform a break-even analysis?
Break-even analysis is based on a breakdown of the total costs incurred by the company into fixed costs that do not fluctuate with fluctuations in production volumes, and variable costs that depend on their volume.
To determine the break-even point, certain simplifying assumptions must be made in the calculations relating to price and costs:
Production in a given period is equal to sales
Total costs depend linearly on production volume - variable costs are proportionally variable and fixed costs are absolutely fixed
The sales price is set so that sales revenue is proportional to sales volume.
We can determine the break-even point in two ways: analytically or graphically.
The analytical method consists of calculating the break-even point using the determining factors of product price, unit variable cost and fixed costs. To determine the break-even point, the sales level is sought at which sales revenue equals the total costs incurred by the company.
There are two types of break-even point - quantitative, which sets the production volume at which the financial result is zero, and valuable , which shows the minimum sales value that must be reached in order not to incur losses. Percentages are also useful for analysis , which determine what part of the forecast demand should be used.
The graphical method consists of placing the relevant data in a coordinate system, which allows the break-even point to be read, located at the intersection of the production value curve and the total cost curve. The graph also makes it easier to read whether the company is in the profit or loss zone.