The work of any company needs constant evaluation. This makes it possible to identify the weak and strong features of the organization of financial, investment and operational activities. For this, analysts apply a variety of techniques. A very important place in the evaluation system is occupied by profitability indicators, the determination formulas of which will make it possible to assess the feasibility of the enterprise’s functioning. This approach involves the study of several indicators. This will allow a comprehensive look at the state of the financial organization. To correctly understand the profitability indicators, you should study the essence of their calculation formulas.
Profitability concept
To assess the rate of profit that the company received in the reporting period, it is not enough just to analyze its dynamics.
After all, it can increase, but at the same time both costs and the cost of production assets will increase. By calculating the profitability indicator on the balance sheet using formulas, it will be possible to identify in which period the amount of fixed capital and working capital was less with an increase in profit.
Profitability ratios, the formulas of which will be considered later, allow us to evaluate the relative performance indicators of the company. This can be done by comparing the amount of costs and their return during the operational period.
Profitability is the profitability (profitability) of an enterprise. One of the most important indicators for analysts, investors and management. To understand how the company worked effectively in the period under review in the context of various areas of its activity, apply the formulas of the main indicators of profitability.
Methodology
To assess the effectiveness of the company, the analyst must correlate the profit with the resources that formed it. Profitability indicators of the enterprise, the formulas of which are used in the methodology, can be expressed in the profit that all products carry, or in the unit of capital invested in it.
Depending on what type of profit is compared with certain resources of the company, the types of valuation are distinguished. The most commonly used of them are only 4 coefficients:
- assets;
- sales
- direct costs;
- common activities.
You can also analyze the indicators of profitability of your capital.
Return on assets
Profitability indicators, the balance sheet formulas of which provide an opportunity to assess the efficiency of capital use, are calculated without fail. These are key performance indicators.
This approach assesses the reasonableness of management decisions in the field of invested capital. The amount of the balance currency is considered here. To understand the correctness of its structure, use other methods of conducting an analytical assessment.
For the calculation, it will be necessary to consider the financial statements of the enterprise, such as form No. 1 under the name “Balance” and form No. 2, which is called the “Profit and Loss Statement”.
The return on assets formula has the following expression:
RA = PE / (VBnp + VBkp) / 2, where PE is the net loss or profit, VBnp, VBkp is the balance sheet currency at the beginning and end of the reporting period.
Return on sales
The formula for the indicator of profitability of sales also acts as an important factor in the study of the effectiveness of the company.
It allows you to evaluate how much profit the organization earns from each unit of sales.
Profitability of sales, the formula of which is presented below, will help you understand how much money an enterprise can keep after financing the cost of finished products, paying taxes and interest on loan obligations. This approach shows the profitability of the issue, allows you to weigh its share in sales.
Return on sales formula:
RP = PE / BP, where PE - net loss or profit, BP - income from sales.
Direct Cost Return
The next step in the analysis is the profitability of direct costs. It allows you to evaluate what return brings the total capital of the company that it owns.
That is, this is a good opportunity to evaluate and draw conclusions about the amount of profit that remains with the company in organizing the production and sale of products.
Profitability ratios, the calculation formulas of which will be considered later, will provide data on the feasibility of using capital and show how many resources the company spent on net profit.
The formula is as follows:
RPP = PE / S, where PE is the net loss or profit, C is the cost.
You can also instead of the net profit indicator consider the income from sales, gross income, etc. in the formula. It all depends on the goals set for the financial analyst.
General profitability
The easiest way to evaluate the company's profitability in the reporting period is to calculate the profitability of the company. The formula will be presented later. To understand the essence of this method, you should understand the essence of the compared articles of form No. 2.
This is a very important approach in the system, which is formed by the main indicators of profitability. Formulas for determining the overall profitability of a company compare the amount of profit before tax and revenue from the sale of goods in the reporting period. It looks like this:
ROD = PN / BP, where PN is the profit (loss) that the company received before paying its tax obligations, BP is the revenue (income) from sales.
Return on equity
It is very important for both investors and company managers to determine the profitability of their capital.
It shows how much profit owners and investors receive from a unit of capital invested in the activities of their company. The formula is:
DGC = ВР / (ВБнп + ВБкп) / 2, where ВР is the value of production, ВБнп, ВБкп is the balance sheet currency at the beginning and end of the period under consideration.
The profitability of the company's own sources of financing can be more fully described by the Dupont formula. It can be expressed as follows:
RSK = PE / BP × BP / VB × VB / SK, where PE - net loss or profit; WB - the amount of assets; BP - revenue (income) from sales; SK - own liabilities.
