The main indicators of profitability: formulas

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. To do this, analysts apply a variety of techniques. A very important place in the valuation system is occupied by profitability indicators, the formulas for determining which allow us to assess the feasibility of the enterprise. This approach involves examining several indicators. This will provide a comprehensive look at the state of the financial institution. To properly understand the profitability indicators, you need to study the essence of their calculation formulas.

The concept of profitability

To assess the profit that the enterprise received in the reporting period, it is not enough simply to analyze its dynamics. After all, it can increase, but at the same time, both costs and the cost of production assets will grow. Calculating by means of formulas the indicator of profitability on balance, it will be possible to reveal in what period the amount of fixed capital and circulating assets was smaller with the growth of profit.

The indicators of profitability, the formulas of which will be considered below, allow us to assess the relative performance indicators of the company. This can be done by comparing the number of costs and their returns 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 its various spheres of activity, the formulas of the basic indicators of profitability are used.

Methodology

To assess the effectiveness of the company, the analyst must correlate profits with the resources that generated it. Indicators of profitability of the enterprise, the formulas of which are applied in the methodology, can be expressed in the profits that the whole product bears, or in the unit of capital invested in it.

Depending on what kind of profit is compared with certain resources of the company, the types of valuation are different. The most commonly used of them are only 4 coefficients:

• Assets;
• Sales;
• Direct costs;
• General activities.

You can also analyze the profitability of your capital.

Return On Assets

The indicators of profitability, the formulas for the balance of which provide an opportunity to make an assessment of the efficiency of the use of capital, are compulsorily calculated. These are the main production indicators. This approach assesses the wisdom 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 data of the enterprise's accounting reports, such as Form No. 1 called "Balance Sheet" and Form No. 2, which is called the "Profit and Loss Statement".

The formula for profitability of assets has the following expression:

RA = PE / (ВБнп + ВБкп) / 2, where PE is a net loss or profit, ВБнп, ВБкп - balance currency at the beginning and end of the reporting period.

Profitability of sales

The formula for profitability of sales is also an important factor in studying the effectiveness of the company.

It allows you to estimate how much profit the organization earns from each unit of sales.

The indicators of profitability of sales, the formula of which is presented below, will allow to understand how much the enterprise can retain after financing the cost of finished goods, paying taxes and interest on credit obligations. This approach shows the profitability of the issue, allows you to weigh its share in sales.

Formula of profitability of sales:

РП = ЧП / ВР, where ЧП - a net loss or profit, ВР - the income from realization.

Profitability of direct costs

The next step in the analysis is the profitability of direct costs. It allows you to assess what return brings the total capital of the company, which it owns. That is, it is a good opportunity to evaluate and draw conclusions about the amount of profit that the company has in the organization of production and sale of products.

Profitability indicators, the calculation formulas of which will be discussed below, will present data on the appropriateness of using capital and will show how much resources the enterprise spent on obtaining net profit.

The formula has the following form:

РПЗ = ЧП / С, where PE is a net loss or profit, С - prime cost.

You can also consider the income from sales, gross income, etc., instead of the net profit indicator. Everything depends on the goals set for the financial analyst.

Profitability of general activity

The easiest way to assess the company's profitability in the reporting period is to calculate the profitability of the company's operations. The formula will be presented later. To understand the essence of this method, it is necessary to understand the essence of the compared articles of Form No. 2.

This is a very important approach in the system, which forms the main indicators of profitability. Formulas for determining the overall profitability of the company compare the amount of profit before tax and the proceeds from the sale of goods in the reporting period. It looks like this:

RPM = PN / BP, where PN is the profit (loss) that the company received before paying its tax obligations, BP - revenue (revenue) from sales.

Profitability of own liabilities

It is very important for both investors and management companies to determine the profitability of their capital. It shows how much profit the owners and investors get from the unit of capital invested in the activities of their company. The formula is this:

RSK = BP / (ВБнп + ВБкп) / 2, where ВР is the production value, ВБнп, ВБкп - the balance currency at the beginning and end of the period under consideration.

Profitability of the company's own sources of financing can more fully describe Du Pont's formula. It can be expressed as follows:

RSK = PP / BP × BP / WB × WB / SC, where PE is a net loss or profit; WB is the sum of assets; BP - revenue (revenue) from sales; SC - own liabilities.

What to consider

Profitability indicators, the formulas of which were presented above, suggest to take into account a number of other aspects.

• Time of analysis. The presented methodology does not take into account the return in the long term from the use of long-term investments. It is better to evaluate the coefficients in the dynamics.
• The incompatibility of monetary units. Profit reflects the results of current activities, and capital (balance sheet) was formed over the years. For the accuracy of the assessment, the market value of the company's assets should be taken into account.
• High profitability can be achieved with a significant increase in risk. Therefore, it is necessary to calculate a number of accompanying indicators (financial, operating leverage, current expenditure structure and financial stability).

Profitability indicators, the formulas of which were presented in the context of several aspects of the assessment, allow to make a conclusion about the expediency of the company's work. Comparing the amount of costs with the magnitude of the results obtained through it, one can understand whether the enterprise is profitable or whether the managers' activity was ineffective in the analyzed period. Given a number of objective aspects in conducting such a study, analysts get fairly accurate results. The conclusions, which are made on the basis of the calculations, can improve the state of activity of each organization.