The Concept of Profitability The term profit is often used interchangeably with

The concept of profitability the term profit is often

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The Concept of Profitability The term profit is often used interchangeably with earnings, income, and margins referring to excess of revenue over associated expenses from business activities over a period of time. As remarked by Lord Keynes in [ CITATION Sho17 \l 1033 ], it is the index to the economic progress, that improves national income and rising standard of living. It is the yardstick for judging not just the economic, but the managerial efficiency and social objective. In other words, the term profit is an absolute term that refers to the amount of income generated or earned by an enterprise within a specified period of time. Whereas profitability on the second is a relative concept that refers to the ability of a firm or enterprise to make profit from its business activities. In other words, it is the ability of a given investment to earn a return from its use, and an index of efficiency which is regarded as a measure of efficiency and management guide to greater efficiency. Weston 1978 cited in [ CITATION Nim13 \l 1033 ] indicates that the profitability of a business is a test of efficiency and a measure of control and worth of the investment to the owners, a margin of safety to the creditors, a source of extreme benefits to the employees, to Government is a measure of taxable capacity, and the basis of legislative action and the to the country, profits are an index of economic progress and national income generated that improves standard of living.
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There is a strong presumption in economics that profitability is mean reverting. Stigler 1963 cited in [ CITATION Fre00 \l 1033 ] stated that there is no more important proposition in economic theory than that, under competition, the rate of return on investment tends towards equality in all industries. These standard economic arguments imply that, in a competitive environment, profitability is mean reverting within as well as across industries. According to the fact Book of 1990 published by the American Land Title Association, the rate of return for insurance companies average 10.5 with a standard deviation of 5.9 for the years 1976-1989. The average return for property/ casualty insurance companies for the same period was 16.1% with (SD 5.5). For Life Insurance companies, the return was 12.5% with (SD 2.1). The rate of return was computed using data to conform GAAP procedures. This report concludes that title insurance companies are less profitable than other types of insurance companies [ CITATION Her92 \l 1033 ].Todd and McEnally 1974 developed a general conclusion that prior to the period of 1962-1970, the profitability of title insurance companies was probably inadequate based on the riskiness of the business. Pandy 1979 quoted by [ CITATION Nim13 \l 1033 ] stated that recent experience in some countries with planned economies indicated that economists are perhaps right in emphasizing the importance of the overall profitability as a criterion for the efficient management of an enterprise.
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  • Spring '20
  • Dr. ASRAVOR

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