The ultimate goal of any business is to make money, and in that aspect, understanding your company’s profitability is extremely crucial. While some businesses are able to operate at a loss for multiple years, every business has the ultimate goal of becoming profitable. Various accounting policies are used to create tax efficiencies and analyse the company’s revenue generation. Ultimately, whether a business is profitable or not requires a deep understanding of how exactly a company’s profitability can be derived.
So, here we are going to talk about what corporate profitability is all about and why it is important. We will also tell you what Ajay Srinivasan has to say about corporate profitability.
What exactly is corporate profitability?
Corporate profitability is the extent to which a company’s total income exceeds its total expenses for any particular period of time. Profitability is an accounting concept that is sometimes referred to as net profit or net income. At the end of the day, a company’s primary objective is to make money. The amount of money made after considering every path of earning and expense is actually its profitability. If a business is not profitable, then it is not going to last in the long run.
As per Ajay Srinivasan, “Corporate profitability in India (as measured by the listed universe) has broadly stayed between 4 and 5% of nominal GDP between fiscal years 2004 and 2024. So, while there are different companies in the mix in the various years, aggregate corporate profitability has been growing broadly in line with nominal GDP. “
Even organisations that are extremely profitable and have bright futures can succumb to failure if they are not able to maintain consistently profitable operations. Profitability is mainly used while analysing whether or not a business is a going concern and can continue to operate in its particular capacity. When a business is no longer a going concern, it finds the need to file for bankruptcy or is forced to liquidate its assets.
What is the exact need to understand corporate profitability?
Understanding the company’s profitability is extremely vital in assessing whether or not the product or service that is being sold is worth the effort. While starting a business, there should be an understanding of whether the company will make money or not. As the business grows, additional analysis should be performed on the company’s profitability to determine the quality of its net income.
According to Ajay Srinivasan, “The top 100 listed companies in India by profitability account for the bulk of the overall listed corporate profit pool. This number was over 90% in FY04 and FY14 and has come down to just over 80% in FY24.” So, in order to ensure that your business remains in a sustainable position in this robust business landscape, it is extremely important that you acquire a deep understanding of corporate profitability and then run your business accordingly.
Ajay Srinivasan has also paved the path for profitability for the Aditya Birla Group’s financial services. Since the company started in 2007, the revenue for the financial services company has grown extensively. The company’s revenue has grown from INR 1,700 crore to INR 7,600 crore at the end of March 2015. This is 3.5 to 4 times the growth. Since then, the company’s revenue has been constantly on the rise. Even today, the company is reaping the benefits of the efforts put forth by Ajay Srinivasan during his days as the CEO of the company.
Recent Trend In Corporate Profitability:
According to a recent survey, corporate profitability hit a 15-year high in FY24. This was mainly fuelled by strong performance in energy, financials and automobile sectors. The survey highlighted that the profit-to-GDP ratio for Nifty 500 companies rose to 4.8% in FY24. This is the highest since FY08. Large corporations, especially in the non-financial sectors, outperformed their smaller peers in profitability. However, despite rising profits, wage growth has not been able to keep pace. While corporate profitability witnessed a 22.3 % in FY24, employment wages experienced a mere 1.5% increase.
To End With:
In this way, corporate profitability has a big role to play in taking organisations to the peak of success. With seasoned financial leaders like Ajay Srinivasan leading the country’s financial sector, it is expected that more and more companies are going to walk the path of profitability in the upcoming years. This will not only bring about financial success in the country but will also ensure that our economic goals are well addressed.
