There is a fairly wide range of indicators needed to calculate the effectiveness of the organization. The main share in this group is occupied by various types of profitability. They are necessary for a more complete and objective analysis of performance results.

What is profitability in simple words

Most often, it reflects how many kopecks of a particular type of profit an organization can receive by investing one ruble in production. And in the case of the sales performance indicator, profitability shows the share of profit in revenue.

What types, indicators, profitability ratios exist

It is customary to distinguish several groups of indicators - production, sales, capital. In each category, 3-4 values ​​are calculated. It cannot be said that all indicators are equivalent and you can take only one from the group.

In order to assess the effectiveness, it is necessary to use the entire set of types of profitability.

Return on assets

They use profit before tax and reflect how efficiently the organization's fixed assets are used and show how much profit a ruble of fixed and working capital or the total value of the company's assets will bring:

• fixed assets (ROFA - return on fixed assets);
• working capital (ROFA - return on currency assets);
• assets (ROA - return on assets).

Basic earning power (BEP) ratio characterizes how much a company needs to earn to cover all costs.

Profitability of production and sales

Calculated on the basis of profit from sales and show the effectiveness of the main activities of the organization:

• products (ROM - return on margin) characterizes how much profit from the sale can be obtained from one ruble, taken into account in the cost of manufactured products;
• sales (ROS - return on sales) reflects the share of profit from sales in the total income of the enterprise;
• personnel (ROL - return on labor) describes how much profit the company will receive from the operation and employment of employees.

Return on equity

Net profit is taken as a basis and characterizes the efficiency of using capital for the purposes of the company's activities. Also, this subgroup can be calculated during planning and allows you to evaluate whether it is profitable to invest or borrow:

• equity (ROE - return on equity) reflects the effectiveness of the use of own funds in the activities of the enterprise;
• invested, permanent capital (ROIC - return on invested capital) shows how many kopecks of net profit the organization will receive by investing one ruble in investments;
• borrowed capital (ROBC - return on borrowed capital) describes the feasibility of taking a loan. If the indicator is higher than the cost of borrowed funds, then it is profitable to take them, if it is lower, then the organization will incur losses.

Video - 12 main profitability ratios:

How to calculate profitability

In general, the profitability formula is the ratio of profit to a part of the enterprise's property, revenue or cost:

Profitability \u003d Profit / Indicator, the profitability of which must be found

For example, if the efficiency of fixed capital is needed, then the numerator will be the profit from the sale, and the denominator will be the average cost of fixed assets. In the case of c, the denominator is substituted with revenue as an indicator of sales.

Return on assets is usually based on balance sheet profit, production and sales - on sales profit, capital - on net income.

The data for the calculation are taken from the balance sheet and the income statement.

General formulas for calculating profitability

Assets:

ROFA = BN / C out, Where

ROFA - profitability of non-current funds,

C vna - the average cost of non-current assets, rubles;

ROCA = BN / C both, Where

ROCA - return on working capital;

BN - profit before taxation, rub.;

C both - the average cost of mobile assets, rubles;

ROA = BN / C vna + C both, Where

ROA - return on assets;

BN - profit before taxation, rub.;

C vna + C both - the average value of the sum of fixed and current assets, rub.

Production and sales:

ROM = OL / TC, Where

ROM - product profitability;

PR - profit from sales, rub.;

TC - total cost;

ROS = PR / TR, Where

ROS - return on sales;

TR - sales revenue, rub.

ROL = PR / SCH, Where

ROL - personnel profitability;

PR - profit from the main activity, rub.;

AMS - the average number of personnel.

Capital:

ROE = PE / SK, Where

ROE - return on equity;

PE - net profit, rub.;

SC - equity, rub.;

ROBC = CHP / ZK, Where

ROBC - return on borrowed capital;

ZK - borrowed capital;

ROIC = PR / SC + TO, Where

ROIC - return on invested (permanent) capital;

PE - net profit, rub.;

IC + DO - the amount of equity and long-term debt, rub.

Balance calculation example

Ekran LLC ended the period with the following financial indicators. It is necessary to display the effectiveness of the organization for 2014. The average number of employees is 25 people. The amount of equity capital is 120,000 rubles.

Name of indicator		Code	As of December 31, 2013	As of December 31, 2014
ASSETS
I. NON-CURRENT ASSETS
	Total for Section I	1100	100000	150000
II. CURRENT ASSETS
	Total for Section II	1200	50000	60000
LIABILITY
III. CAPITAL AND RESERVES 6
	Retained earnings (uncovered loss)	1370	20000	40000
IV. LONG TERM DUTIES		1410
	Borrowed funds		10000	15000

Calculation of return on assets:

ROFA = 48,000 / (100,000 + 150,000)/2 = 0.384

ROCA = 48,000 / (50,000 + 60,000)/2 = 0.87

ROA = 48,000 / (125,000 + 55,000) = 0.26

Calculation of profitability of production and sales:

ROM = 50,000 / 25,000 = 0.5

ROS = 50,000 / 75,000 = 0.67

ROL = 50,000 / 25 = 2,000

Calculation of return on equity:

ROE = 40,000 / 120,000 = 0.3

ROBC = 40,000 / 15,000 = 2.66

ROIC = 40,000 / 120,000 + 15,000 = 0.296

Conclusions from the calculations in the example:

For the existing production, all indicators are at a normal level. Obviously, it is profitable to use borrowed funds, employees work efficiently, and the amount of working capital is optimal. It is worth paying attention to the fixed capital, it is likely that it is not fully exploited or there are reasons that reduce the performance of non-current assets.

It is also advisable to analyze the situation with a large amount of equity, which reduces the overall efficiency of the enterprise. At current indicators, it is rational to use and restructure equity capital.

In what cases is its calculation useful?

The indicator is necessary for a qualitative assessment of the effectiveness of the enterprise. Absolute numbers, such as profit and cost, do not give a true picture of the organization's performance.

They show only the effect of production. Profitability, in its turn, allows you to assess how well and fully the property and resources of the company are used. It shows how much money can be obtained from the exploitation of a particular type of own or borrowed funds.

All types of profitability are important for assessing the effectiveness of the organization. Like other relative indicators, they allow not only to analyze the activities of a given enterprise, but also to compare with competing companies.

Profitability, calculated over several years, reflects the dynamics of performance and can become the basis for medium and long-term planning. Particular attention should be paid to the profitability of fixed assets, since they occupy a fairly large share in the organization's property and are often used inefficiently.

Video about profitability and profitability:

The return on investment of capital is the strongest workforce in the business investment industry. The funds used to create the company's capital have their own value, the value of which is calculated by the organization's ability to select funding sources. During the process, it is important to define the value of the indicator in a broad sense, i.e. find out what the company costs all the exploited capital or what result the cooperation with the company brings to an individual or legal entity. In simple terms, this is the amount of financial responsibility assumed by the organization for the use of other people's funds in its work. The decision of this point often falls on the shoulders of the audit at the stage of searching for investments or their use.

Balance sheet and types of capital

Balance - an instant reflection of the state of the assets that are operated in the organization, and the capital that forms these assets. This is a kind of economic version of the law of conservation of energy: assets do not just appear, they are obtained by increasing capital.

Assets are current and non-current. Capital, in turn, is divided into equity (in the territory of the Russian Federation, this is usually authorized capital + profit earned over the years of operation), long-term (debts taken on for more than a year) and short-term (accounts payable, others, for example, accrued, but not taxes transferred, wages, etc.) liabilities.

Total assets - an indicator that summarizes non-current and current assets.

Invested capital = the volume of current and non-current assets - short-term relationships.

Equity is also allocated (authorized capital and accumulated profit, or: non-current assets + current assets - long-term and short-term liabilities) and working capital (current assets - short-term liabilities).

Total capital is the sum of all capitals involved in the operation of the company. It is necessary to take into account the overall proportion of equity and debt in this indicator. The part with debt is most often referred to as the financial leverage of the enterprise.

In the balance sheet, the total capital is: Liability (line 1370 section 5 in the first form of the balance sheet) or the amount Capital and reserves (line 490 section 3 in the first form), Long-term relationships (section four, line 590 of the first form), Short-term liabilities (Section 5 of the balance sheet in the first form, line 690).

Total Capital Calculation

To identify the amount of ordinary capital, various methods of calculation are suitable, for example, a methodical method of measured assessment. At the same time, the volume of the indicator, the costs associated with finding borrowed money, and the amount of income remaining within the company are entered into the balance sheet process.

As a result, it remains to find the size of the variable called the return on investment. It is calculated as follows:

Pk \u003d Rp + Chp / Sk * 100 (!)

Notes:

• Rp - expenses associated with the "invitation" of third-party investments;
• Np - the amount of net profit remaining under the management of the enterprise;
• Sk is the total capital that is operated by the company.

In turn, the amount of total capital by auditors is determined by different methods, the most popular of which are:

1. The amount of long-term assets at the residual price of currently available assets, that is, the final information of 1,2 and 3 sections of the asset balance;
2. Sum of net existing and non-current assets. The size of the first indicator is determined by the method of exclusion from the results of the second and third sections of the asset of the balance of current liabilities;
3. Volume of balance currency.

All indicators are calculated on some exact date (most often at the end of the period) or by the method of determining the average value.

The use of the first method of working with total capital is based on the application of its value, that is, the price of all the company's property, the source of which is funds raised on a long- and short-term basis. The use of this indicator in the denominator of the algorithm (!) helps to calculate a variable called the return on assets.

The calculation by another method is based on the fact that capital is a long-term investment. As a result, only own and long-term replacement capital is taken into the process, these are assets from which the existing liabilities have been taken away.

The last method is very similar to the first. Differences begin to appear only in a situation where there are certain numbers in the company's balance sheet in the "Losses" item. On the size of losses, discrepancies are formed between the property of the organization and general liabilities (there are more liabilities than property). The economic content of the ratio of property - general liabilities - losses lies in the fact that some part of the capital was lost to the company due to its irrational distribution, and as a result, all activities receive less funding than reflected in the balance sheet. In such a situation, the first method of counting will be considered more correct.

The second method is most often used if it is required to evaluate the profitability of long-term assets.

If the owners (owners, shareholders) consider that it is necessary to leave a share of the profit in the turnover of the organization in order to satisfy its other financing needs in such a step, then they can claim to receive advising profit. It turns out that the income from the initial investment is not only the amount of money paid to them, but also the entire net profit of the company, otherwise it is simply not profitable for the owners not to take out a share of the profit in turnover. Therefore, the total value of the capital exploited in the organization must contain the entire total calculation of net profit, from which extraordinary expenses are deducted.

Together with the average price of the total capital involved, it is very important to be aware of the payback of its individual components. It turns out the return on equity is calculated as follows: the numerator of the algorithm is the income of the owners. The denominator shows the capital transferred by shareholders to the work of the company. It includes: authorized capital, funds and reserves, unused profit, additional capital.

It is also important to take into account that the amount of equity capital is determined over time. Therefore, there is a need to select a methodology for calculating equity, or rather: based on information about its condition on the exact date (most often the end of the period); determination of the average indicator for the period.

The modern market economy is characterized by free enterprise and competition between business entities.

Any enterprise strives for the most efficient use of its resources. An economic analysis is carried out to evaluate the results of the work.

A large number of absolute and relative indicators and coefficients are calculated.

This allows you to identify bottlenecks, find reserves for improving efficiency and outline ways for further development. One of the most important indicators is profitability.

The concept of profitability and its purpose

Profitability is the resulting relative performance indicator of the enterprise, which shows the return on available resources and capital.

It is private from the division of profit (balance sheet, gross,) by total costs, revenue, individual groups of assets. Profitability shows, what efficiency the company receives from each ruble invested in production. It can be expressed as coefficients, but more often it is calculated as a percentage. If the enterprise incurs losses, then certain types of profitability are negative.

Unlike profit, which is an absolute measure, profitability is not affected by inflation and allows you to correlate received income with expenses incurred. This gives a more complete picture of the state of affairs in the enterprise. It is possible that a high growth in profits is accompanied by even higher growth in production costs. In this case, although profits increase, profitability will decrease. Analysis of this indicator in dynamics allows you to identify unprofitable types of products, hidden reserves for further growth and evaluate the company's pricing policy.

Kinds

Performance indicators at different enterprises may differ, as each company has its own specifics of work.

All types of profitability are divided for 3 groups by the type of the analyzed production indicator:

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Calculation procedure and formulas

For calculations, forms No. 1 and 2 of financial statements are used - and.

The numerator of all formulas is profit. The net is more often used, but sometimes the balance sheet, gross, sales profit,.

The denominator is the analyzed indicator (assets, capital). It would be wrong to simply take these values ​​from the reporting, since during the period - six months, a year - their value on the balance sheet changes. Therefore, for the correct calculation the average cost for the period is calculated. For example:

If the value of the introduced and retired assets is known, then the calculation can be made using a different formula:

The formula for calculating the total profitability:

Foreign analysts also call this indicator profitability of functioning capital or economic resources.

Formula shows the return of all means of labor involved in the production process. The denominator indicates the cost of not all fixed assets, but only those that are directly involved in production (OPF). These include: machine tools, machines, equipment, special tools, presses, turbines, engines and other production assets.

TO normalized working capital include:

• production stocks (raw materials, fuel, auxiliary materials, components, spare parts);
• semi-finished products and products in work in progress (objects of labor that have not completely passed all stages of the production process). Only own products are taken into account;
• deferred expenses (funds for technology development, development and launch of new types of products in the future period);
• finished goods in stock.

All of the above working capital are most often working capital assets (ObPF). Therefore, sometimes they are put into the formula.

Formula return on sales:

This indicator gives an understanding of how effectively sales are going on. That is, how many percent of the profit is contained in each ruble of revenue. To assess the impact of operating and non-operating income and expenses, it is possible to use the value of gross profit in the formula. Also, the calculation is carried out using the profit from the sale.

Formula return on assets:

When calculating this indicator, the sum of all assets of the enterprise (balance sheet currency) or their individual types (current, non-current) is used. Estimated together with resource productivity (revenue/assets).

Calculation profitability of the reporting period:

This indicator gives an assessment of the entire financial activity of the company (not just sales of products) for the past period.

Formula profitability of OPF:

Shows the return on OPF. The cost of all fixed assets used in production, including leased ones, is taken for calculation.

Calculation return on costs (cost):

This indicator can be calculated both for all products and for individual product groups. An assessment of the profitability of the production and sale of each product (or the demand for the service provided) is given. When calculating this indicator, there is when the revenue will only cover the cost (profit in this case will be equal to 0).

ROI:

This indicator gives information to the investor about how effective the investment is. It is used to compare and evaluate different projects. Analyzed along with payback period, return on capital and net present value.

Calculation examples

We will carry out the calculation and analysis using the example of a plant for the production of cold-formed welded pipes. The main consumers are enterprises of the chemical, fuel and nuclear industries.

Initial data:

1. Balance sheet profit for 2015 - 2760 thousand rubles.
2. OPF at the beginning year - 17120 thousand rubles.
3. OPF on con. year - 17330 thousand rubles.
4. OB.Norm. to the beginning year - 3240 thousand rubles.
5. OB.Sorm. per con. year - 3750 thousand rubles.

Let's calculate the annual average cost of OPF, normalized working capital and calculate the overall profitability:

Thus, over the past year, from each ruble of the means of labor involved in production, the plant has extracted 13.32% of the balance sheet profit.

Data analysis

To analyze the overall profitability, it is necessary to compare this indicator in dynamics with 2014.

All data for calculations will be reflected in the table:

Index	2014	2015	Deviation
Balance sheet profit, thousand rubles	2690	2760	+70
The average cost of the OPF for the year, thousand rubles.	17185	17225	+40
The average cost of normalized working capital for the year, thousand rubles.	2390	3495	+1105
General profitability, %	13,74	13,32	-0,42

Despite the growth of balance sheet profit, there is a negative trend in overall profitability. This was influenced by the growth in the cost of OPF and normalized working capital.

To assess the impact of each factor, we will carry out a factorial analysis by chain substitutions.

Change in book profit calculate according to the formula:

Change in OPFavg. year. calculate according to the formula:

Change in OB.Av.Year. calculate according to the formula:

The balance (total impact) of all 3 factors is calculated by the formula:

The increase in the balance sheet profit increased the overall profitability in 2015. by 0.34%. The growth in the cost of fixed assets reduced this figure by 0.03%, the increase in the cost of normalized working capital also had a negative effect - by 0.73%. In this case, the growth rate of profit is lower than the growth rate of the normalized working capital of the enterprise, and that is why the overall profitability in dynamics has decreased. The impact of OPF is minimal (the cost has slightly increased compared to the previous year).

In 2015, the plant received an additional order for the production of thin-walled pipes. More production capacity is required to fulfill it. The existing equipment is fully loaded and the company launched this additional order into production in parts, moving the deadlines for the implementation of current orders. This led to disruptions in the rhythm of work. Modernization of one pipe welding line is scheduled for 2016. This is the main event in relation to the OPF.

Also, over the past year, there was an increase in overstocking of warehouses and work in progress. The reason for this was the lack of hydrotesting equipment, the purchase of which is scheduled for next year. A large number of pipes lay before this stage of the production process. So far, it has been possible to agree with some customers on the optional conduct of these tests. Finished thin-walled pipes according to a new order were produced in small batches and had to lie in a warehouse in order to send a large batch to the customer.

The company is actively working to find new suppliers of auxiliary materials: lubricants and coolants, containers, packaging for pipes, solvent, gloves, liquid argon. They occupy a high share in normalized working capital. Some suppliers promise to raise prices for these materials, and in order to increase the level of overall profitability, the enterprise needs to reduce the cost of purchasing them.

The value of the overall profitability indicator in the production sector is on average 4–25% for different companies. However, as follows from our example, this value in itself does not allow us to draw correct conclusions. Conducting factor analysis gives an idea of ​​the real situation in the enterprise and helps to find problem areas and hidden reserves.

Each enterprise develops its own program to increase overall profitability, using the data of the analysis.

There are several groups of enhancement methods:

1. Improving the use of OPF. If the growth rate of profits is higher than the growth rate of the cost of OPF, then their operation is recognized as effective. The methods in this group include:
   • reconstruction, modernization and technical re-equipment;
   • compliance with the deadlines for repairs of the BPF and control of their quality;
   • reduction of downtime and optimal loading of equipment;
   • material incentives for working personnel and increasing their motivation;
   • introduction of computer programs in equipment management.
2. Improving the use of normalized working capital. Similar to the OPF, their work is effective at higher rates of profit growth. The methods are as follows:
   • establishing the optimal size of inventories;
   • turnover acceleration;
   • control over the volume of work in progress (the danger of high growth is that it may be a hidden defect) and finished products in warehouses;
   • timely provision of raw materials, materials and the establishment of reasonable consumption rates;
   • control .
3. Reducing the cost of production;
4. Growth in the production of more highly profitable products and the search for new customers;
5. Increasing production capacity and production volumes;
6. Improving product quality, reducing the final marriage and production waste.

All these methods are closely intertwined. An objective economic assessment of the enterprise and correct management decisions lead to increased profitability and positive performance results. As a result, the well-being of the whole society as a whole improves.

What is profitability and why it is necessary to calculate it is described in the following video lesson:

Profitability, which came into our language from German, contains the word “profitability” as one of the synonyms and essentially means the ratio of income to a company’s predetermined resource, for example, capital.

If they talk about the enterprise as a whole, then they usually mean the profitability of all its resources taken together.

Return on equity as an economic indicator has become the main factor that determined the attractiveness of the company for investors in the long term.

This indicator informs about how much the ruble invested in the business gives the owner profit.

An important part will be the profitability of products, the calculation formula of which is well known to specialists.

But the starting point in evaluating the result of the company's work is a comparison with the size of the bank's rate of return on capital.

2.Formula return on equity.

Typically, the return on equity formula is used when valuing similar firms that belong to the same industry. Comparison of the result of the application of capital reveals the degree of preparedness of managerial personnel. From a mathematical point of view, the formula is simple.

The return on equity is equal to:

• - net profit is divided by the amount of capital;
• - Multiply the quotient by 100%.

The amount of capital is the value of the property, indicated in a specific monetary terms in the balance sheet. It belongs to the owners of the company's shares minus existing debts.

But gross margin is a slightly different concept in business with a special financial expression.

Return on equity can be calculated using another formula. It is enough to multiply the return on assets with the coefficient of financial leverage.

The following conclusions follow from the formula:

• — the rational use of investments gives a chance to increase the profit of shareholders;
• - the income from the activities of the company is much higher than the lending rate.

The size of the financial lever shows the efficiency of the turnover of borrowed funds. Intelligent management of the firm means that the financial leverage in numerical terms is greater than one, but not very high. Its high value gives out an overly large share of loans, which is always associated with high risk.

3.Formula return on total capital.

The total capital combines non-current and current assets. Profitability informs them about the assets that the company managed to attract to receive revenue of one ruble.

With the indispensable consideration of this circumstance, the profitability index of any enterprise is formed.
The profitability of total capital can only be estimated by the ratio of the price of all assets over a certain period on average and income before taxes were paid.

The return on total capital is determined from the ratio of profit minus interest and taxes to the company's assets.

Profit maximization for employees means:

• - the need to increase revenue;
• - reduce non-production costs and prime cost;
• - reduce the amount of assets on the basis of a decrease in accounts payable, receivables.

The formula for return on total capital is the division of operating profit by the size of assets. The resulting figure resembles the return on assets. Attracting investment means, in practice, a deterioration in the return on total capital.

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4.Formula level of profitability.

There is in the economy the profitability of fixed assets, the formula for calculating it. And the level of profitability summarizes the results of the company, reflects the profitability in relation to the base of the business.

The amount of profit, covering both the costs of the production sphere and the sale, in excess of them forms a net income, an indicator of the profitability of the enterprise. It is no coincidence that it is a reliable indicator of the quality of work.

The level of profitability correlates the value of current and fixed assets with the amount of income. Such assets form value. The smaller it is, the higher the result of the company.

The profitability formula is simple:

• - it is necessary to summarize the costs of fixed assets and current assets;
• - the amount of income divided by the amount of costs received.

The level of profitability will be significant with the good functioning of working capital, fixed assets, and their low price. The profitability ratio plays its role, its formula uses information about the company's balance sheet, losses, and income when calculating.

5. Formula of general profitability.

The overall profitability expresses the dependence of normalized means of circulation, the average price of production assets and balance sheet profit. The connection of funds with material and equivalent expenses forms the profitability of the company. It is the main indicator in the analysis of the work of any company.

The formula for overall profitability is as follows:

• - the total amount of balance sheet revenue must be divided by the price of fixed assets, tangible assets in circulation, intangible assets (on average for twelve months);
• - multiply the quotient by 100 percent.

In fact, the overall profitability and net profitability, the formula of finished products and the entire company coexist on an equal footing in the economy.

6.Formula cost-effectiveness.

Analyzing the accounting report in order to determine the effectiveness of the use of material resources, it is impossible to do without a cost-benefit ratio.

It is used to characterize the profitability of production, indicates the income received by the company from the ruble involved in the manufacture and sale of products.

The percentage return on investment formula is calculated as follows:

• - net profit (in rubles) is divided by the cost of goods sold (in rubles);
• - the resulting quotient is multiplied by one hundred percent.

The return on costs is related to the amount of cash inflow, which includes depreciation and net income for the reporting period, as well as the cost of goods sold, representing the total amount of expenses on it.

Describing the profitability of activities, this formula complements the overall economic position of the company.

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7.Formula threshold of profitability.

The threshold of profitability is revealed by such concepts as the number of products sold in physical terms, the profit of the enterprise. They are guarantors of coverage of both semi-fixed and variable costs with revenue equal to zero.

The threshold of profitability is represented by the volume of sales. Under him, the company, not having achieved income, itself covers all the vital costs.

This is the level of sales of products, when the company, without receiving a loss, could not achieve profit in its activities.

Profitability threshold formula in rubles:

• 1. deduct variable expenses from income;
• 2. We multiply revenue by fixed costs;
• 3. The resulting product is divided by the difference.

Each company has its own rate of return, the formula for success. But, in general, profitability is a relative indicator. It can be expressed as income per unit of investment funds, and more often as a percentage.

8. Formula of profitability of the main activity.

The key indicator of the success of the operation of the enterprise was the profitability of the main activity. Like other coefficients for evaluating the economy, including return on capital, the formula for the company's balance sheet, profitability expresses the efficiency of any process in production.

To determine the profitability of the main activity of the company, it is enough:

• - a report in form number two on losses and incomes;
• - the balance sheet in form number one.

To find out the profitability ratio of the main activity, it is necessary to divide the sales income by the production costs. This coefficient indicates the amount of net proceeds from one ruble, which is spent on the manufacture of products.

The established profitability of profit, its output formula characterize the company as a whole and each direction of work separately.

9.Formula return on investment.

The capital invested in the activities of the company has its own profitability.
Its formula:

• 1. net operating profit, excluding adjusted taxes, divided by investment capital;
• 2. The resulting quotient is multiplied by one hundred percent.

By investment is meant only the capital that is invested in the main production of the enterprise. And the revenue in this case is taken into account only from the main activity. At the same time, the profitability of funds, the formula of which is known, complements the economic calculations.

Invested capital is the sum of current assets and net fixed assets, excluding non-interest bearing liabilities.

10. Formula of profitability of sold products.

Profitability of products has three components:

• 1. Profitability of each product.
• 2. Profitability of sold products.
• 3. Profitability of marketable products.

Any indicators of profitability, the formulas of which are developed by economic science, are interconnected. So, the profitability of sold products is considered in connection with the proceeds from the sale of the released goods, its cost in full. This is a very important indicator of the quality of the enterprise.

Profitability of products confirms the effectiveness of the costs of its production. The income from the sale crowns the labor efforts of the employees of the enterprise, therefore, it directly affects wages and opportunities for expanding production. It is enough to know the cost price, profitability, how to calculate, the calculation formula, and then the economic situation in the company becomes clear.

The profitability of sold products is the ratio of the proceeds from its sale to the cost price in full. This simple formula is confirmed by practice.

It allows you to calculate one of the main economic results of the company and make a forecast for the future, taking into account potential opportunities.

Eloquent in this regard is the “profitability of net profit, the formula” of which is also simple. It is not in vain that economic science puts the company's profitability indicators at the forefront, since it is they who are able to really confirm the generalized characteristics of the results of labor and the joint efforts of the company's employees.

The essence of profitability indicators

Definition 1

Profitability characterizes the profitability of activities. This is a relative indicator, expressed in the ratio of invested funds and income received. The value of the indicator has only positive values, since when an enterprise receives a loss, profitability indicators are not calculated.

As such, there are no standard values ​​of profitability indicators, however, in various sources, you can find average statistical values ​​in the context of industries, countries, etc.

Remark 1

Profitability indicators most fully reflect the efficiency of the enterprise, therefore they are widely used in financial analysis. Profitability can be analyzed both as a whole for the enterprise and for individual areas of activity.

When making a decision on investing, it is necessary to compare the profitability of the organization with similar enterprises in other industries, interest rates on bank deposits, return on securities, etc. shows the dynamics of growth, then you should abandon the placement of capital in this enterprise.

Remark 2

Return on equity reflects the income received per unit of invested funds.

Return on equity

In the course of financial analysis, the following indicators of return on capital are calculated:

• Return on total capital is expressed as the ratio of profit before tax and the average annual value of total assets
• Return on equity based on net profit is calculated as the ratio of net profit to the average annual value of total assets
• Profitability of long-term investments - the ratio of profit before tax to the amount of equity capital and long-term liabilities. This indicator is the most interesting for investors when making a decision on investing, as it shows the efficiency of the use of invested funds.
• Return on fixed capital - the ratio of profit before tax to the average annual cost of fixed assets
• Return on working capital - the ratio of profit before tax to the average annual cost of working capital
• Return on equity - the ratio of net profit to the average annual cost of equity. This indicator is most interesting to the owners of the enterprise, as it characterizes the efficiency of the use of the owner's funds.
• Return on borrowed capital - the ratio of profit before tax to the amount of borrowed capital.

Remark 3

It should be understood that the greater the share of borrowed funds in the total capital of the enterprise, the lower the profitability due to the fee for the use of attracted resources (fee for using a loan, interest rate under a loan agreement, etc.).

When conducting a financial analysis, the indicators of return on capital are considered in dynamics. In the event of deterioration in the reporting period compared to the previous one, the analysis identifies and analyzes the reasons for the decrease in profitability and possible solutions to problems.

In addition to the amount of profit, when calculating the return on capital, you can use the indicator of revenue from product sales. In this case, the calculation characterizes the level of sales for each ruble of investments in the property of the enterprise.