The economic activity of any enterprise must be evaluated in order to get an accurate idea of how efficiently the company is managed, what risks it faces today and what are the prospects for its future development in the future. For this, an analysis of many economic indicators is carried out , an important place among which is given to such as profit before tax.
In order to understand what the economic meaning of this indicator is, it is necessary, first of all, to understand what it consists of. Profit before tax consists of profit from sales, adjusted for the following indicators, which act as a kind of amendments:
- income or expenses associated with the operating activities of the enterprise. This category includes income and expenses that occurred at the enterprise, however, not directly related to the sale of goods and services, that is, its main activity. These incomes and expenses may arise from the provision of certain assets for rent, deductions for the use of intellectual property, dividends brought in the case of the company holding various securities and so on.
- income or expenses referred to as non-operating. These incomes and expenses arise in case of fines or penalties due to non-fulfillment of contract terms, payment of forfeits, receipt of any funds free of charge (according to the gift agreement), as well as profit or loss of previous years revealed by the accounting department only in the current year.
Thus, the profit before tax is determined by the formula:
PDO = PP +/- OD / R +/- VD / R.
In this formula, PDO - this is the indicator that we calculate, OD / R - is operating income or expenses, and VD / R - is income or expense, classified as non-operating.
As you can see, profit before tax is an intermediate indicator between the profit from sales and net profit. You need to understand that for economic analysis, it is important not just the value of this indicator on the principle of “more is more, it is certainly better”, but the structure of this indicator plays a big role. Since profit before tax includes three main components, it is also important to determine the relationship between them. The higher the share of profit from sales and the lower the share of other components, the better and more efficiently the enterprise management system is built, and vice versa - the higher the share of random income and expenses, the worse the mechanism of the company’s work. The value of profit before tax can be very high, however, if the share of profit from sales in it is relatively small, this means that the company exists only at the expense of random income, the flow of which can stop at any time. Thus, analyzing the structure of this indicator, we can draw conclusions about the quality of the functioning of the company management system.
As you can see, profit before tax is an important indicator of the economic condition of the company. His analysis can say a lot about how the company is developing, how efficiently it is managed, and what are the further prospects for its development. This indicator is necessarily included in the financial statements of the enterprise and is shown in the statement of financial results, as well as in the statement of losses and profits of the company. The correct calculation of this figure will help to correctly inform counterparties and potential investors about how effective their investments will be, how reliable this investment object is, and what profit they will be able to get in the future. After the profit before tax is calculated, the sum of all taxes that the company must pay is deducted from it, and thus, the net profit indicator of the enterprise is calculated - its main financial result.