Of all the performance indicators of the enterprise, one of the most important is profitability. It is not surprising, because what can bother a businessman more than the rate of profit he receives? Naturally, in order to calculate this indicator, a profitability formula is needed. We will tell you how to calculate it in this article.
The profitability formula is extremely simple, but before proceeding to its consideration, it is necessary to define the calculated indicator. According to economic theory, profitability is an indicator of the economic efficiency of an action, the use of an asset or the work of the enterprise as a whole. Accordingly, in each case, the profitability formula will be different. It is possible to divide indicators of economic efficiency into three groups:
- By types of assets - calculates the profitability of each of the assets available at the enterprise: fixed assets, financial instruments, personnel and so on. In this case, profitability is calculated very simply by dividing the net profit by the value of an asset.
- By types of economic activity - the profitability of performing certain operations is estimated. Most often, sales profitability is estimated, that is, the ratio of profit to revenue. Thus, we see how many kopecks of profit each ruble received from sales brings us.
- Profitability of the enterprise - the formula here is not one, but several: this includes the whole range of the above indicators, plus the so-called overall profitability, calculated as the ratio of net profit to the value of the enterprise (balance sheet currency).
As you can see, there is nothing complicated in calculating profitability - most often it is calculated by simple division. This indicator is widely used both in business planning and in the analysis of the results of an enterprise. Moreover, in the case of post-factum analysis, we are dealing with an already generated indicator, and when writing a business plan, we only try to assume what our future profit will be. In this case, it is logical to assume that the following factors will affect profitability:
- Production costs - as the profitability formula shows, costs are in the denominator, therefore, their increase reduces the target
- The selling price of the goods - the higher it is, the greater profit we get. At the same time, one should not forget that pricing is also subject to the influence of the laws of supply and demand, which means that we cannot regulate profitability solely by changing pricing policies.
- Market situation - depending on the type of market (monopoly, competitive, oligopolistic), the rate of profit will also change. The less competitive the market, the greater the power the company has, and, accordingly, the more profitability indicators it can count on. Increased competition, on the contrary, may force the company to reduce profitability. An extreme case is dumping, in which the company sets prices so low that for some time it works at a loss, but in this way destroys its competitors.
Conclusion: the formula for calculating profitability is simple and understandable, however, studying this indicator, and, more importantly, managing it is a complex process that requires a lot of attention and meticulousness. Analysis of profitability over the past period makes it possible to assess the effectiveness of the enterprise and is the basis for predicting profitability in the future, and it is this indicator that shows the feasibility of the company further carrying out its activities.
