Profitability of working capital: coefficient, formula, analysis

The management of any company is obliged to monitor the performance indicators of the organization of financial and economic activities. The net profit of the enterprise depends on it, its stability. An important stage in assessing the effectiveness of his work is the profitability of working capital. This indicator is necessarily researched by analysts.

Based on the data obtained, measures are being developed to improve the financial and economic situation in the enterprise. Circulating assets are involved in the production of goods. Therefore, without their evaluation, the company can not organize the process of manufacturing its products correctly. The profitability indicator allows analysts and the company's management to consider the effect of current assets on the amount of profit of the reporting period.

The concept of working capital

The current assets of the enterprise consist of resources that are fully consumed in one cycle. They are included in the cost price. Their period of turnover is short-term (does not exceed 12 months). Such assets include raw materials, materials, semi-finished products, fuel, as well as accounts receivable and short-term investments. Their quantity is subject to normalization.

The profitability of working capital will be the greater, the fewer resources the company will spend to increase profits. However, the number of such assets should be sufficient to ensure continuous production activity.

Therefore, the financial service is working to reduce in the composition of current assets receivables, work in progress, inventories. To develop the right measures to improve the profitability index, it is necessary to conduct a comprehensive in-depth analysis.

The concept of profitability

Profitability indicators in the financial and economic analysis allow you to assess the effectiveness of the use of certain resources, their impact on profits. After all, in order to receive a positive financial result in the reporting period, the production should be organized in such a way that the funds are channeled into the economy sparingly.

But, in turn, lack of resources leads to failures, production downtime. This also negatively affects profits. The indicator of profitability of current assets reflects the effectiveness of their use in the production process. In the analysis, this coefficient should be considered in dynamics over several periods. It is also possible to compare it with those of competitors.

Calculation formula

The profitability of working capital, the formula of which is used in financial analysis, is quite simple. To understand how to interpret the result obtained in the course of research, it is necessary to understand the essence of this calculation. The formula for profitability of current assets is as follows:

- Ros = PE / OC * 100, where PE - net profit, OS - the average annual amount of working capital .

Data for the calculation are presented in the form No. 1 and 2 of the financial statements. Current assets are line 1200 of the balance sheet. The net profit is indicated in line 2400 of the OPU.

If the analysis found that the profitability is greater than 0, then the use of current assets is effective. Due to its activities, the company makes a profit. A negative result indicates an incorrect organization of production. Resources are used inefficiently.

Example calculation

The profitability of working capital, the formula of which was considered above, is investigated in dynamics. The result of the calculation is represented as a coefficient or percent. The second option is preferable. For a correct analysis of this indicator, the calculation should be considered with an example.

Suppose, in the previous period, the average annual value of current assets on the balance sheet was 10 million rubles, and in the reporting year - 12.5 million rubles. At the same time, the company received a net profit of 2.5 million rubles. Both in the past and in the current period. The profitability is calculated according to the formula given above:

- Ros1 = 2.5 / 10 * 100 = 25%.

- Ros2 = 2.5 / 12.5 * 100 = 20%.

The indicator was positive in the analyzed period. But the dynamics indicate a decline in profitability. The increase in the number of current assets was the reason. Therefore, the governing bodies of the company should consider the structure of the balance sheet and determine the factors constraining development. Activities should be aimed at reducing the number of current assets.

The standard

In addition to considering the dynamics of the indicator, it should be compared with the normative value. For each industry, it's your own. This is due to the material intensity of production. In industry, it is high. After all, for the production of new products, considerable raw material, energy, etc. costs are required. The coefficient of profitability of working capital in this case rarely exceeds 0.2.

For new enterprises, the zero value of the indicator is considered acceptable. But for trading companies, depending on the specifics of the activity, the norm is considered if the coefficient is in the range from 0 to 0.8. In this case, the effect is mainly on the settlement system with debtors. Material costs in this case are minimal, so they have no big impact on profitability.

Asset turnover

Circulating assets are the most liquid resources of the company. Therefore, their number should be sufficient for timely settlement with creditors. But thus movable property should not accumulate and settle in stocks, a debt receivable. Therefore, the speed of one revolution plays an important role. This time, for which a certain article or the entire set of current assets pass through all stages of production, turns into a monetary form.

This indicator also affects profitability. The faster the turnover occurs, the greater profit the company receives. Therefore, the governing bodies are interested in promoting the improvement of this indicator in every possible way.

Profitability and turnover

The profitability of the basic current assets depends on the speed of turnover. To understand this relationship, you should consider the formula for calculating this indicator. It looks like this:

- Ros = Рр * Коб, where: Рр - profitability of sales, Коб - factor оборачиваемости turnaround actives.

Turnover rate is calculated by the formula:

- Cob = BP / OC, where BP is the sales revenue.

Under the profitability of sales means the ratio of revenue from sales to the cost of goods or services. This ratio characterizes the efficiency of the company's operating activities in general.

Breakeven calculation

Performing an analysis of the profitability of working capital, receive a whole set of data on the organization of financial and economic activities of the company. Based on them, planning is carried out.

Initially, it is required to calculate the breakeven level. This is the feature that separates the profitability of the enterprise from its unprofitability. At this point, the resources spent on obtaining net profit become equal to it. The company does not receive any profit or loss.

When reviewing these financial statements , the break-even point is determined when net profit is received in the amount of 0 rub. This allows you to plan the minimum required revenue from sales, in which production will break even. Hence, the minimum amount of costs (including working capital) is calculated .

Factors influencing profitability

The indicator of profitability of working capital is affected by many factors. They can be external and internal. To determine the profitability of working capital in the planning period, company management must take them into account.

External factors can not be affected, but it is possible to envisage changing them. These include the cost of raw materials, labor and fuel, seasonal fluctuations in demand and prices for competitive goods. Also, to external factors, on which profitability depends, rate inflation.

Internal ways of influence are available to management. Therefore, planning activities to improve the efficiency of the company, they are given special attention. Internal factors include labor productivity, the organization of the production process, approaches to management, and so on.

Thanks to competent, thoughtful principles of conducting the company's operations, it is possible to increase profits and cut costs.

Ways to improve profitability

There are three main areas that can improve the profitability of working capital. On the basis of a comprehensive analysis of the company's activities, decisions are made on the introduction of certain measures to improve production efficiency. These include accelerating the implementation, a thoughtful reduction in the number of working capital, a change in prices for products.

Under the acceleration of turnover, we should mean a reduction in the period of the entire cycle. Having studied each of its stages, it is possible to identify constraining factors. Eliminating them, the company is able to accelerate the turnover of funds. At the same time, certain resources are released, which can be used to improve the quality of products, expand production.

The reduction in the number of current assets should be clearly calculated. The lack of funds leads to production downtime, a decrease in solvency, investment rating and stability. All actions in this direction must be clearly calculated. Changes in prices should be made taking into account market conditions.

Activities to improve profitability

There are a number of key activities that can be used to improve the efficiency of using current assets. To reduce the period of transformation of materials into cash, the company can pay special attention to those goods that are in high demand.

It will also be expedient to increase the assortment, reduce stocks in the warehouse, carry out work to improve the quality of products. An important role is played by a competent advertising campaign.

The profitability of working capital increases with competent rationing. The introduction of materials with improved qualities, scientific developments is also of great importance.

The change in prices also has a huge impact on profits. At a constant cost price rise in the price of goods or services will be expedient in the absence of competition. If the market is filled with various substitutes and similar products, it is necessary either to reduce the prime cost (not at the expense of quality), or to reduce prices as much as possible.

Acquaintance with such indicator, as profitability of circulating assets, allows to carry out competent estimation of efficiency of production resources. Based on the results of the study, planning is carried out, ways are being found to improve the organization of turnover. This leads to a rational use of resources, an increase in net profit of the company.