Overall profitability: calculation formula

To analyze the effectiveness of the enterprise, economists and accountants use quite a number of different indicators. Among them there are those that illustrate the overall results of the company's economic activities, others affect more narrow spheres. Often, to form an opinion on the success of the organization, it is enough to study its overall level of profitability. The formula, as well as its components and the significance of numerical indicators, will be considered in this article.

How to calculate the profitability?

The main goal of every entrepreneur, manager or manager is to achieve the highest possible results in the implementation of production, trade, consulting or other activities. Evidence of success can safely be considered a profit. This indicator is calculated by subtracting from the total revenue (or the amount of revenue) expenses incurred by the enterprise.

The main indicator, which in percentage terms shows the degree of efficiency of the use of resources available to the enterprise (material, labor, financial), is the overall profitability. The formula for its calculation is extremely simple. This is the ratio of the net profit (PE) obtained to the average annual cost of fixed assets (OF) and the regulated working capital (FNL): RR = PE / (OF + FNL) x100%.

In other words, this indicator reflects the actual growth of capital invested in economic activity. It is equal to the ratio of profit to assets.

Cost-effective and unprofitable enterprise?

When the total profitability (the formula allows you to calculate the relative indicator, which is always above zero) is greater than one, then the profit exceeds the cost. The enterprise is profitable. It brings in revenue. Otherwise, the company is called unprofitable. A negative indicator can be specified only conditionally, if we take into account the concept of negative profit (loss).

Factors determining profit and profitability

The volume of profit and, accordingly, the level of profitability is influenced by numerous factors. They are external and internal. The first group includes those that do not depend on the efforts made by the staff. To this category belongs the dynamics of the cost of materials, changes in the price of products and depreciation rates, the increase in transport tariffs. For the analysis of economic activity these nuances are extremely important. They affect the value of generalizing indicators throughout the enterprise.

The volume of sales, prime cost and overall profitability (the formula is given above) will inevitably depend on whether there are changes in the structure of the range of products. As for internal factors, they reflect the level of labor inputs of employees of the enterprise, as well as how efficiently and competently the management disposes of production resources.

Universality of the indicator

The coefficient of overall profitability, the formula of which is the same for all economic entities, becomes a universal indicator. Given that it is relative, and not absolute (as, for example, profit), it can be used to compare the performance of several completely different enterprises. Let's talk about them in more detail.

Absolute figures (revenue, sales volumes) do not allow a correct comparison, since the result will not be reliable. It is quite possible that the efficiency and sustainability of an organization with a small sales volume will be higher than that of a corporate giant. In terms of its value, the overall profitability of the enterprise (the formula makes it possible to calculate the relative index) is equated to the coefficient of efficiency (EFFICIENCY). But that is not all. In addition to the general indicator, the profitability of capital, production, sales, personnel, investments, etc., is also calculated.

Overall profitability: formula by balance

Most types of profitability are calculated on the basis of balance data. This accounting document contains information on all key categories: assets, liabilities, shareholders' equity of the organization. The form is made twice a year, which allows economists to analyze data at the beginning and end of the period. Individual types of profitability are calculated taking into account the following indicators:

• Assets (negotiable and non-negotiable).
• Values of own capital.
• The volume of investment and others.

However, the calculation based on only one of the values is extremely incorrect. Correct analysis implies the use of averages. To obtain them, the arithmetic mean is found: from the indicator at the beginning and the end of the current period. In the numerator of the formula is the net profit. And in the denominator, the indicator whose profitability is to be calculated. But that is not all. The total profitability (the formula will contain the numbers indicated in the balance sheet) is calculated after the document is drawn up.

What does "profitability of capital" mean?

The company's own capital is the financial expression of the founders' claims to the company. And for them, and for investors are extremely important indicators that characterize the capital of the firm. Pay attention to the calculation of the overall profitability. The formula allows you to get a generalized concept of the state of the organization, its effectiveness. Based on the data obtained, investors make decisions that are sometimes vital to the enterprise. Being directly interested in its success and development, they invest their own or borrowed funds and expect to share with the owner future profits.

How is the total return on capital determined? The formula for the calculation is as follows: the ratio of the net profit (PE) calculated for a certain period to the average annual value of the value of own capital (CK): RR = (PP / SC) x100%.

The data obtained as a result of the calculations are compared with similar indicators of previous periods. Also, economists apply these figures to compare the performance of an enterprise with other companies in a particular industry. Observing an increase in the overall return on capital, they conclude that financial resources are being used correctly. The obvious success in conducting economic and economic activities attracts the attention of investors. And opens the way for the business owner to further develop his business.