During the analysis of the company’s activities, various indicators are calculated. This allows you to draw conclusions about the effectiveness of the organization. One of the important indicators that is calculated during the analysis is profitability. There are several methods for determining it. How to calculate profitability will be discussed in detail below.
General definition
How to calculate profitability? To do this, you need to understand the essence of this indicator. Each enterprise works for profit. It should increase in dynamics. For profit, the company spends certain resources. This can be raw materials, labor, finance, energy, etc. Their number should not exceed the amount of profit. Otherwise, the company operates at a loss.
The less the company spends resources for profit, the better. These are absolute indicators, when compared, you can get data on the performance of the company. For this, the general profitability formula is used . It allows you to determine the relative indicator. How to calculate profitability as a percentage? The resulting coefficient must be multiplied by 100. This results in a percentage.
To calculate the overall profitability, you need to determine the amount of profit of the company, as well as the costs that arose when this financial result was achieved. Information for the calculations is taken from the financial statements of the enterprise. Profitability ratios may vary. They reflect the effectiveness of one or another aspect of the company.
These indicators are considered both in total for the reporting period and by month. It is very important to study their changes in dynamics. Profitability is compared with similar indications of the plan or competing organizations in the industry.
What does the indicator reflect?
If you want to calculate profitability as a percentage, you need to understand what reflects the result. This indicator reflects the amount of resources spent on each ruble profit. Profitability reflects whether the company's funds have been used effectively. If not, profits will not be high enough to cover costs.
Profitability should be studied in dynamics. This allows us to draw conclusions about the real situation at the enterprise. For this, the calculation is carried out for several previous periods. Next, the analyst tracks trends. Profitability must constantly increase. Its decrease indicates an increase in costs or loss of profit.
If adverse factors are identified, measures are being developed that will help eliminate negative trends. Otherwise, in the future, the enterprise may face a lot of difficulties. Getting net profit will be increasingly difficult. Therefore, the profitability of different areas of the company must be considered in the analysis.
Considering how to calculate the profitability of the enterprise, it is worth noting that a number of factors affect this indicator. It depends on the characteristics of production and the external competitive environment. The result obtained is considered not only in dynamics, but also compared with various similar indicators. So, in the course of the analysis, the actual and planned profitability are compared. Also, this indicator must be calculated for competing enterprises. Be sure to consider the ratings of the company, its products over the past few years.
Varieties
How to calculate profitability? Examples of formulas will be discussed later. With their help, you can determine the effectiveness of the use of almost any resource, sources of acquisition or costs. There are several basic formulas for determining profitability. They allow you to determine the effectiveness of use:
- Property (assets) - RI. Reflects the efficiency of the use of available resources that have been sent to production.
- Equity - RSK. Shows the return on capital that was contributed by the founders when creating the organization.
- Productive assets - RPF. Reflects the efficiency of use of inventories, fixed assets of the enterprise.
- Cost - RZ. It characterizes the degree of return on current production costs .
- Sales - RP. Product Profitability.
Also calculate the cost of one ruble of production and asset turnover. Each of these indicators reflects a specific aspect of the organization.
To perform the correct calculation, you need to know how much of the profit the company receives from the use of certain resources. You need to compare the relevant indicators.
Profitability
To understand the general meaning of the indicator, it is necessary to consider the formula and an example of calculating the profitability of an enterprise. How to calculate this indicator? The formula is pretty simple. The numerator will be the net profit of the company. You can use to calculate the amount of revenue from sales. The choice depends on the purpose of the calculation. Information necessary during the calculation is presented in the form No. 2 “Report on financial results”.
In the denominator of the formula, you need to substitute the sum of all assets of the enterprise. Data on this is presented in the form No. 1 "Balance". You will need to calculate the average amount of property of the company for the reporting period. To do this, add the assets of the balance sheet at the beginning and end of the period. The result is divided by 2.
Considering how to calculate the profitability of the enterprise, the formula and example must be studied in more detail. This indicator characterizes how the entire capital of the organization is used. For calculations, the following formula is used:
RI = P / Asred x 100, where P is the profit before tax (p. 2300 of form No. 2), Asred is the average value of the company's assets for the reporting period.
If this indicator decreases in dynamics, it is necessary to consider its structural components. The profitability of current and non-current assets, as well as fixed assets, etc. is determined. It is necessary to determine in which funds the funds are not expediently accumulated. The capital structure in this case requires optimization.
Example
To understand the characteristics of the indicator, you need to consider how to calculate the profitability of the enterprise. To do this, you need to compare indicators in the past and reporting period.
Thus, the contingent company received profit before tax in the previous period in the amount of 350 million rubles. At the same time, the balance sheet currency amounted to 950 million rubles. A year later, the financial statements reflected the results of the organization. Profit before tax amounted to 650 million rubles. while the balance sheet currency increased to 2450 million rubles. (due to the growth of receivables).
Knowing how to calculate the profitability of the enterprise, the formula of which was considered above, you can find out the profitability indicator in the past and this year.
Rip.p. = 350/950 x 100% = 36.84%
After a year, profitability became like this:
Rio.p. = 650/2450 x 100% = 26.53%
It can be concluded that even though profit before tax increased in the reporting period, profitability decreased. This is due to an increase in receivables in the balance sheet structure. It is necessary to reduce its quantity. Otherwise, the company's funds will be used irrationally. Knowing how to calculate the profitability of the enterprise (an example of the methodology and decoding of the result were presented above), managers can make adequate decisions about the further development of the organization.
Return on equity
In the analysis, other profitability formulas are also used. How to calculate how effectively the capital of the organization is used? For this, it is necessary to determine the total amount of financial resources that were allocated to the enterprise in the period under review. It is presented as a result of form No. 1.
To perform the calculation of the indicator of capital use, you will need to determine the amount of net profit of the organization after paying all deductions and taxes. This information is presented in form No. 2 on line 2400. The calculation will be as follows:
RK = PE / K x 100, where PE is net profit, K is the average annual cost of the company’s capital.
If in dynamics this indicator decreases, it is necessary to consider the profitability of own and borrowed capital. The liability structure may be unbalanced. To do this, it is enough to determine the profitability of borrowed capital:
RZK = PE / (DP + KP) x 100, where DP - long-term liabilities (liabilities), KP - short-term (current) liabilities.
If the borrowed capital is not enough, the company should attract paid resources to carry out its activities. If, on the contrary, there are a lot of them, it is necessary to reduce the number of borrowed financial sources. Otherwise, the performance will decrease. This will lead to a decrease in the amount of net profit in future periods.
Return on sales
Every analyst must know how to calculate the profitability of sales. This indicator is one of the most important in the process of researching the efficiency of an enterprise. It is indicated in foreign literature by the letters ROM. Using this technique, you can calculate whether sales are effective. To do this, compare the amount of revenue from sales with the total amount of funds spent on creating products.
In accordance with the purpose of the analysis can be considered the profitability of an individual product or total output. The costs that are involved in the calculation is the cost. It can be industrial or complete. In the first case, the cost does not include commerce costs.
This separation allows you to determine in which area of the organization difficulties arise. They may be associated with an irrational approach to the organization of the technological cycle. This can reveal the analysis of sales, which is calculated at the production cost. If the decrease in profitability is caused by an ineffective commercial policy, the company should pay special attention to this area of its activity.
Sales performance calculation
Knowing how to calculate profitability, an example of determining this indicator should be considered in more detail. This will allow you to delve into the features of this indicator. So, the formula will be like this:
RP = BP / S x 100%
For example, you can compare the three groups of products that the company produces. Production “A” brought profit in the amount of 10 million rubles in the reporting period. Moreover, the total cost of this product amounted to 25 million rubles. Production “B” brought profit in the amount of 8 million rubles in the reporting period. Its cost is 19 million rubles. B products brought a loss of 0.5 million rubles. The cost of production amounted to 15 million rubles. The calculation of profitability will be as follows:
P "A" = 10/25 x 100 = 40%
P "B" = 8/19 x 100 = 42.1%
P "B" = -0.5 / 15 x 100 = -3.3%
Although the profit from the sale of product “A” was higher, it turned out to be less profitable than the product “B”. Therefore, it is more expedient for the company to increase the output of this product category. Product "B" was unprofitable. It is necessary to determine the causes of this phenomenon and take appropriate actions to increase this indicator. Otherwise, the entire line that produces product "B" will need to be closed.
Also, overall sales profitability should be considered in dynamics. If a gradual decrease in the result is determined, it is necessary to carry out the calculation for each group of goods. This allows you to identify the cause of deviations. It is also necessary to calculate the effectiveness of product sales not only at the total cost, but also at production costs. It will also be able to discover some negative factors holding back production development.
Fixed assets
Studying how to calculate profitability, you need to consider another technique. It allows you to determine the level of efficiency of use of fixed assets of the organization. This calculation is especially important for enterprises that use high-tech equipment.
To perform the calculation, you need to determine the amount of net profit. It is compared with the average annual amount of fixed assets. The formula will be as follows:
ROF = PE / OFsred, where OFsred is the average annual value of fixed assets.
If this indicator decreases, it is necessary to determine the cause of this phenomenon. Perhaps the company accumulates outdated equipment that is not capable of producing products of the required quality. In some cases, problems are observed in the field of sales.
This indicator must be compared with previous periods, planned indicators, as well as the results of competing enterprises.
Profitability threshold
Another important indicator that is used in the planning of the organization, is the threshold of profitability. This indicator determines the volume of production at which total costs will fully pay off. You can calculate the profitability threshold by the formula:
PR = / , where - fixed costs, VM - gross margin ratio.
To perform the calculation, you need to determine the gross margin. To do this, the number of variable costs is subtracted from the total revenue from sales. Next, you can calculate using the basic formula.
Having studied how to calculate profitability, you can comprehensively analyze the activities of the organization. Such techniques open up a series of data on the adequacy of previously made management decisions. Based on the information received, we can conclude about the effectiveness of the use of organization resources. Based on the study, company management can take a number of actions to improve the situation in the future.