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The Importance Of Profitability Indicators In Assessing The Financial Performance Of Economic Entities

Author

Listed:
  • HADA Izabela Diana

    (Department of Doctoral Accounting Studies, "1 Decembrie 1918" University of Alba Iulia, România)

  • MIHALCEA Mihaela Maria

    (Department of Doctoral Accounting Studies, "1 Decembrie 1918" University of Alba Iulia, România)

Abstract

Financial performance is a major point of interest for both the internal and external environment of an economic entity. To be prosperous, attractive, efficient and promising development, a company must obtain a profit. In the conditions of a dynamic economic environment, assailed by many changes, maximizing profitability or the ability to make a profit as a measure of performance is the main objective of the activity of an economic entity. Profitability is one of the forms of expressing economic efficiency with summarizing the efforts made to obtain the expected results. Profitability rates measure the results obtained in relation to the activity of companies (commercial profitability) with economic means (economic profitability) or financial means (financial profitability).The main purpose of this research is to highlight the importance of profitability indicators in assessing financial performance. The research also aims to present the current state of knowledge, by calling for specialized bibliographic references, highlighting current concepts on the notion of profitability, outlining the importance of profitability indicators in the activity of measuring financial performance. In order to assess the efficiency of the activity of an economic entity, the research is based on an empirical study at a company in the pharmaceutical industry by determining rates of return based on information from the financial statements of the entity for the period 2009-2018. The research results show us that, in the activity of measuring financial performance, the profitability indicators show us the economic efficiency of the entire economic activity. Being essential in the conditions of a dynamic economic environment, assailed by numerous changes, profitability is the expression of any entity earnings, and obtaining the profit as a measure of profitability (income increase in relation to the reduction of costs) represents the main objective of the activity of an economic entity. Return on assets (ROA), return on equity (ROE) and return on sales (ROS) are some of the key indicators in assessing financial performance, indicators that must be used by stakeholders to substantiate decisions.

Suggested Citation

  • HADA Izabela Diana & MIHALCEA Mihaela Maria, 2020. "The Importance Of Profitability Indicators In Assessing The Financial Performance Of Economic Entities," Annals of Faculty of Economics, University of Oradea, Faculty of Economics, vol. 1(1), pages 219-228, July.
    • Handle: RePEc:ora:journl:v:1:y:2020:i:1:p:219-228
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    References listed on IDEAS

    as
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    5. DeNisi, Angelo S. & Pritchard, Robert D., 2006. "Performance Appraisal, Performance Management and Improving Individual Performance: A Motivational Framework," Management and Organization Review, Cambridge University Press, vol. 2(2), pages 253-277, July.
    Full references (including those not matched with items on IDEAS)

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    More about this item

    Keywords

    profitability; financial performance; return on assets; return on equity; return on sales;
    All these keywords.

    JEL classification:

    • L25 - Industrial Organization - - Firm Objectives, Organization, and Behavior - - - Firm Performance
    • M41 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Accounting - - - Accounting
    • M42 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Accounting - - - Auditing

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