To analyze the effectiveness of the enterprise, economists and accountants use a lot of different indicators. Among them, there are those that illustrate the general results of the company's business activities, while others touch upon narrower areas. Often, in order to form an opinion about the success of an organization, it is enough to study its overall level of profitability. The formula, as well as its components and the value of numerical indicators will be considered in this article.
How is profitability calculated?
The main goal of each entrepreneur, manager or leader is to achieve the highest possible results in the implementation of production, trade, consulting or other activities. Evidence of success can be safely considered profit. This indicator is calculated by subtracting from the total income (or revenue) expenses that were incurred by the company.
The main indicator, which as a percentage shows the degree of efficiency of use of resources available to the enterprise (material, labor, financial), is the overall profitability. The formula for calculating it is extremely simple. This is the ratio of net profit (PE) to the average annual value of fixed assets (PF) and normalized current assets (NOS): OR = PE / (PF + NOS) x100%.
In other words, this indicator reflects the actual increase in capital invested in economic activity. It is equal to the ratio of profit to assets.
Profitable and unprofitable enterprise?
When the total profitability (the formula allows you to calculate a relative indicator, which is always above zero) is greater than one, then profit exceeds costs. The company is cost-effective. It brings income. Otherwise, the company is called unprofitable. A negative indicator can only be indicated conditionally if we take into account the concept of negative profit (loss).
Factors determining profit and profitability
Numerous factors influence the amount of profit and, accordingly, the level of profitability. They are external and internal. The first group includes those that are in no way dependent on the efforts made by personnel. This category includes the dynamics of the cost of materials, changes in the price of products and depreciation rates, an increase in transport tariffs. For the analysis of economic activity, these nuances are extremely important. They affect the value of general indicators throughout the enterprise.
Sales volume, cost and overall profitability (the formula of which is given above) will inevitably depend on whether there are changes in the structure of the range of products. As for the internal factors, they reflect the level of labor investments of the enterprise employees, as well as how efficiently and competently the management of production resources is managed.
Indicator universality
The coefficient of overall profitability, the formula of which is the same for all business entities, is becoming a universal indicator. Given that it is relative, and not absolute (such as profit), it can be used to compare the performance of several completely different enterprises. Let's talk about them in more detail.
Absolute indicators (revenue, sales) do not allow a correct comparison, as 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 value, the overall profitability of the enterprise (the formula allows you to calculate a relative indicator) is equal to the coefficient of performance (COP). But that is not all. In addition to the general indicator, they also calculate the profitability of capital, production, sales, personnel, investments, etc.
Total Profitability: Balance Formula
Most types of profitability are calculated on the basis of balance sheet data. This accounting document contains information about all key categories: assets, liabilities, equity of the organization. The form is drawn up twice a year, which allows economists to analyze data at the beginning and at the end of the period. Certain types of profitability are calculated taking into account the following indicators:
- Assets (current and non-current).
- The value of equity.
- Volume of investments and others.
However, the calculation based on only one of the values is extremely incorrect. Correct analysis involves the use of averaged indicators. To obtain them, the arithmetic mean value is found: from the indicator at the beginning and end of the current period. In the numerator of the formula is net profit. And in the denominator - that indicator, the profitability of which is required to be calculated. But that is not all. The overall profitability (the formula will contain the numbers indicated in the balance sheet) is calculated after the document is prepared.
What does the concept of “return on equity” mean?
Equity of the enterprise is called the financial expression of the requirements of the founders to the company. Both for them and for investors, indicators characterizing the capital of the company are extremely important. Pay attention to the calculation of total profitability. The formula allows you to get a generalized concept of the state of the organization, its effectiveness. Based on the data received, investors make decisions that are sometimes vital for the enterprise. Being directly interested in its success and development, they invest their own or borrowed funds and expect to share future profits with the owner.
How is the overall return on equity determined? The formula for the calculation is as follows: the ratio of net profit (PE) calculated over a certain period to the average annual value of the cost of equity (SC): OP = (CP / SC) x100%.
The data obtained as a result of calculations are compared with similar indicators of previous periods. Economists also use these numbers to compare the performance of an enterprise with other companies in a particular industry. Observing an increase in the overall return on equity, they conclude that financial resources are being used correctly. Obvious success in conducting economic and economic activities attracts the attention of investors. And it opens the way for the business owner to further develop his business.