Profitability is a relative measure. It characterizes the level of profitability of the enterprise. This indicator reflects the overall performance of the business, shows the profitability of individual areas of activity. Profitability indicators are used in financial analysis, since they are able to more fully than profit, to characterize and reflect the real results of economic activity. Their value demonstrates the correlation of the result of activity with consumed resources.
Financial analysis gives a true picture, reflecting the effectiveness of the company, its solvency, profitability, development prospects. The data of such an analysis allow us to rely on specific figures when making strategic decisions for future periods.
Profitability indicators are very rich in variety. All of them are characterized by the efficiency of the enterprise from different positions. These indicators can be grouped into three large groups in separate areas. These include product profitability, return on sales and return on equity.
Return on equity or return on equity reflects the ratio of retained earnings or partial profits to the average cost of all capital invested in the enterprise or its individual parts. Capital can be own, joint-stock, borrowed, permanent, circulating, fixed, operating, etc.
Return on equity of a bank or enterprise is a financial indicator that characterizes profitability in the context of the assets at their disposal, with which they make a profit. When analyzing these indicators, all assets held by the enterprise are taken into account. The total return on equity is calculated as follows.
To calculate return on equity, you need to determine the volume of sales for a certain period. Information can be considered both on shipment and on payment received for shipped products. The companies in this matter proceed from the convenience of the method of determining the sales volume.
Then you need to determine the cost of sales. This is done in one of the ways characteristic of determining the volume of sales. In addition, it is necessary to determine operating expenses (fixed costs) for the same period. The amount of taxes that will be paid for a given period is calculated.
After that, net profit is calculated. For this, the cost of production, operating expenses and taxes are deducted from sales. All indicators in the calculations must be carried out to one unit of measurement (for example, thousands of rubles).
At this stage, you can begin to determine the total assets. Total assets is the sum of the total liabilities of an enterprise and its equity. Now you can calculate the return on equity. For this, net profit must be divided into total assets.
If an enterprise operates with various financial indicators in its activities, the return on capital can be calculated in another way. For this, return on sales is multiplied by the turnover of total capital.
For company owners, the most important indicator is return on equity. He acts as the main criterion for the effectiveness of the use of their invested funds. This indicator is calculated as the ratio of net profit to equity on the balance sheet.
Analysis of profitability allows you to reflect the quality of the financial condition of the company and see its prospects for the future. Therefore, in the analysis, special attention is paid to the quality of indicators and their proper grouping by enlarged groups.