When you are looking to make the most out of your investment, you will want to make sense of how you can get ahead of everything. You want to increase your profitability, so you are going to talk to a company like Finest Invest GmbH that can help you to sort out the information and make your profitability index higher. What is a profitability index? In short, profitability index determines the relationship between a project’s present value and the future cash flow of the project.
So, why do you care? Well, think about it. If you can make a safe guess as to how well a company is going to do in the future, wouldn’t you be more secure in buying their stock or determining not to take a particular risk. Now, there’s no way to be certain how an investment will turn out, but the closer to certainty you can get, the less stressful the whole process can be.
How do we figure this out? An index is essentially a ratio; and if you remember from high school or college what a ratio is, it’s essentially a fraction. In short, the profitability index is the projected value divided by the initial investment. If this number is 1 or more, then the investment is safe to make. Essentially, the number you get is how much money you can expect to make per dollar you invest. It makes sense, if it’s a dollar or more, then you’re going to at least break even or profit. If it’s below one, then you’re going to lose on your investment and it’s not worth the risk. You can find out the projected value by doing research.
Now, as you can probably see, this isn’t totally reliable. With how this index works, it basically tells you to invest whenever you would break even or even if the profit would be minimal. Needless to say, this is a foolish way to do things; it’s an estimate, so if you expect to barely break even you have more of a risk of NOT breaking even. This index assumes that you have endless resources available for index, thus greatly decreasing your risk even before you invest. Obviously this is not the case, so instead we are to use the profitability index in order to gauge risk.
For example, you have 3 different stocks that you could invest in. The one has a profitability index of .75, one has a profitability index of 1.15, and the last 1.75. So, for every dollar you would put into these, you would get this much back. You definitely don’t invest in the .75 one, and you definitely want to invest in the one that is estimated to be 1.75. But, what about the 1.15 one? Well, it depends. Like I said before, it’s based on you having unlimited resources. The risk has now been estimated a little more numerically. Are you willing to take the risk? Only you can determine that.