Question

Discuss the importance of operational profitability and net period profitability for the company owners and financial institutions by giving an example and be clear in your work.

Answer 1

Operating profit is important for the firm as as it reflects how effectively the resources are getting utilised.it is a profit from core Matrix of a company.

Operating profit doesn't take into account any sale of assets and interest like payment which are considered to be non operating in nature.

It presents a better picture of a company which is high on debt than net profitability as net profit includes debt periodic repayments.

A company should always focus over maintaining a better profitability Ratios in order to maintain core competencies and having a control over the market share.

A financial institutions which is into lending funds to these companies must focus iver their both ratios .

Net profitability ratio from the perspective of financial institution present a better picture of the overall efficiency of the company in relation to previous Debts as it includes with periodic debts repayment. A company with Higher Return on capital over cost of debt is always preferred by a financial institution to lend money.