Question

Why are profitability ratios important in measuring performance in a healthcare organization? Please explain it from a perspective of a for-profit as well as a not-for-profit organization.

Answer 1

Common profitability ratios used in analyzing a company's performance include gross profit margin (GPM), operating margin (OM), return on assets (ROA) , return on equity (ROE), return on sales (ROS) and return on investment (ROI).

In general, profitability ratios measure the efficiency with which your companyturns business activity into profits. Profit margins assess your ability to turn revenue into profits. Return on assets measures your ability to use assets to produce net income.

Profitability ratios can be of some use when analyzing a charity's finances depending on the nature of its activities. For example, some charities sell products in addition to accepting donations. Such a non-profit could apply a Gross Profit Ratio to measure the performance of this one aspect of its operations. It might also be able to apply a Return on Assets ratio and an Asset Turnover ratio when analyzing certain activities.