Important from an economic point of view is the indicator of profitability. Why is he given such attention, and how to calculate it? What makes it possible to evaluate and recognize economic profitability, the formula for its calculation and the resulting result?
What it is?
What is generally called profitability? This is the percentage of profits and material inputs invested in something. How is classic profitability calculated? To do this, divide the net profit by the sum of all expenses, subtract one from the result, and multiply this number by 100%. As an example, this situation may come up: a person invested 1000 monetary units, but received 1200. So, it is necessary to carry out such calculations: ((1200/1000) -1) * 100%. As a result, a value of 20% will be obtained.
Scope of Knowledge of Economic Profitability
The importance of profitability as an assessment of the state of affairs is difficult to underestimate. It was used even before the advent of economics on an intuitive level. Having learned the indicator of profitability, we can judge the state of affairs at the enterprise. So, with an increase in profitability, the company will be able to confidently exist, even if now there is a significant amount of debt.
When profitability is kept at the same level, this often indicates that the entire accessible market was busy, and new areas should be explored. But you need to be careful, since any strong influence from the outside can ruin the whole situation. With a drop in profitability, one should beat the bells, even if in the current situation the revenues are such that the existence of the company for a year is quietly ensured. You can predict the future of the enterprise, even without a large amount of information, but only data that allows you to find out what is the economic profitability of the enterprise. The formula helps identify problems before they even appear.
The concept was first introduced by David Ricardo under the name of surplus value. According to his designation, during production processes the value of raw materials and goods ready for sale increases, and the economy is faced with the task of equitable distribution of economic benefits.
The economic profitability of the company on the basis of the balance sheet
Since the company is the basis for the economy, profitability is one of the most important issues. How to calculate the surplus value? If we take according to generalizing indicators, then you can use the previously specified formula. But there is another option for calculating the balance sheet, when profitability is calculated according to form 2 (summarize 20, 30 and 40 articles), and the balance sheet profit is divided by the amount received. Taking into account how important economic profitability is, the balance sheet formula allows you to obtain data that is currently valid in a certain time period, for which information is taken. The resulting value is a profitability ratio. To translate the values into a percentage form, subtract one and multiply the remainder by 100%.
How are you doing with assets?
Calculation of one enterprise is far from everything; assets should also be considered. But before calculating, you should find out certain information:
- Calculate the cost of sales.
- Calculate the net profit received by the enterprise.
- Calculate total assets. They mean the amount of equity and financial liabilities. If you get a negative value, it means that there is our debt to someone. If you get a positive value, then someone has a debt to us. When calculating, not only the body of the loan or debt is taken into account, but also the interest on them (if interest obligations). It should be noted that there may be a situation where both the company owes money and the company should. Then in this way they calculate the financial condition - if they owe more to the company, then things are pretty good.
How, on the basis of these data, is the economic return on assets calculated? The calculation formula is different from the above equation. Now, actually to the calculations themselves. It is necessary to calculate the ratio of net profit to total assets. This will be profitability. To convert to a percentage value, multiply the value by 100%. Here it is necessary to step back and report that such an indicator as return on assets is strict: it is undesirable to lift it up, but if it is small, then capital is not efficient and is simply "consumed".
What can affect the final value?
To clarify the results of economic activity, you can calculate the profitability of sales. All the necessary data were given earlier, so the case is small. It is necessary to divide net profit by sales revenue. To get the value as a percentage, subtract one and multiply by 100%. Changes are also possible when calculating for different periods that are adjacent - this is the difficulty when calculating economic profitability. The formula for calculating the balance sheet can show the status for a given period, and the formula for the company for the entire time of operation.
Normal ROI
But what should be the normal level of profitability for the company to operate successfully and at the same time provide the population with goods or services at affordable prices? In economic science, it is generally accepted that in order for a company to generate revenue and at the same time enjoy popularity, it is necessary that the profitability be at the level of 14%. Although it should be noted that some companies, offering their products, achieve significantly better results. But one should not fall below this threshold, since as the occurrence of unforeseen expenses, this indicator will decrease, and the real profitability indicator for the enterprise will be about 10%.
It should also be borne in mind that the company not only earns on its existence and a good life for the owner, but also must create opportunities for expansion. Focusing on this thesis, you should always think about how to invest part of the profit in the future.
