The value of the profitability rating is a measure of the economic profitability level of the company. A higher value of the rating will indicate a higher rate of economic profitability.
The following table can serve as a reference for the use of this rating & colon;
|Rating value range||Interpretation|
|0 - 0||Unprofitable company||0 - 5||Very low profitability company|
|5 - 6||Low profitability company|
|6 - 6||Average profitability company|
|6 - 7.5||Company with high profitability|
|7.5 - 10||Company with very high profitability|
The economic profitability, as measured by this rating, is a magnitude that compares the funds obtained, during an accounting period, by the company assets (regardless of how they were financed), with the level of investment made by the company to obtain those assets. Suppose the following two companies: (m.u. = monetary units)
|Company||Funds obtained||Investment level to obtain those funds|
|A||100 m.u.||10.000 m.u.||B||10 m.u.||100 m.u.|
All things being equal, it might be thought that an investor would prefer company A over company B because A is the one that yields the highest funds, 100 m.u., versus the 10 m.u. obtained by company B. However company B is preferable over company A because to obtain those 10 m.u. B has used comparatively fewer resources than A. Company B had to use 100m.u. to get 10, which implies an economic profitability of 10%, whereas A, to get the 100 m.u. has had to use 10000 m.u., which represents an economic profitability of only 1%.
Of the three main magnitudes that Gradement considers define every company:
it is precisely this profitability that is the main measure of comparison between companies. In general, it will be preferable, from the investor point of view, the more profitable company. Although we will always have to condition the comparison with the other two magnitudes of price and solvency. In this way, the objective of the investor must be to mainly look for profitable companies, although conditioning them to also be solvent (solvency rating) and not expensive (rating price).
Economic profitability is one of the main parameters, together with solvency and price, which defines the economics of a business. The traditional way of calculating this profitability is simply by dividing the pre-interest profit among the total assets of the company. Gradement uses its own more sophisticated algorithm to calculate this important magnitude much more accurately.
For the economic profitability calculation Gradement uses a combination of the following accounting variables:
And for the profitability rating calculation Gradement compares the economic profitability with the:
From an assets point of view, economic profitability can be defined, as we have already seen, considering the funds generated by the company's assets, regardless of how they are financed. It is also possible to see this magnitude from the point of view of liabilities. From this point of view, the profitability can be seen as the remuneration that the company can distribute to all the owners of the capital, that is to say, all sources that finance the company assets.
To understand the difference between economic profitability (measured with the profitability rating) and the financial profitability (measured with the financial profitability rating we have to consider this profitability from the point of view of liabilities. While the economic profitability measured the potential remuneration to all the finanicing sources of the company's assets, the financial profitability only considers in its calculation the potencial remuneration to the holders of the equity of the company (shareholders).
The economic and financial profitability are both related by the financial leverage (measured with the external financial non-dependency rating), so that: