The most important indicators of how efficiently an enterprise operates are profitability indicators. The profitability of the organization is determined not by any one coefficient, but by their whole combination. This is due to the fact that the activities of the enterprise are diverse, it can be described from different points of view, and its management uses resources of various nature. It’s almost impossible to cover all the indicators, so we’ll literally consider a couple of factors that are extremely important.
The first indicator we will focus on will be the return on equity. As you can understand by name, this indicator characterizes the efficiency with which the capital invested in the company by its owners is used. This indicator, like all profitability ratios, is defined as the quotient of dividing profit by the value of which profitability is determined. Often there is a problem, which indicator of profit to include in the calculation. However, in this case, everything is extremely simple, since the return on equity is determined on the basis of net profit. It is also worth noting that the indicators for the numerator and denominator are taken from different reporting forms, and this characterizes the fundamental differences in them. Profit is the amount accumulated over the period, and the amount of capital is reflected at a specific date. The problem is that during the period, the amount of capital could change, but this is a very rare phenomenon. If such a change has occurred, then it can be taken into account by using the average capital for the period in the calculation.
Having determined the profitability of our own funds, we learned how effective the company is from the point of view of the owner. And how effective is the production activity of the company itself? Asset profitability indicators will help to make a conclusion about this. Obviously, these indicators will be calculated in the same way: profit in the numerator, and assets in the denominator. Calculation is also usually based on net profit, but sometimes profit that is not cleared of taxes is used. Usually, three indicators are calculated that characterize the profitability of the total amount of property, as well as the profitability of fixed capital and current assets separately. Assets are a more dynamic indicator, which means that it is better to include in their calculations their average value for the period that is being analyzed. Of course, you may not have enough information to determine the average. In this case, you can use the value of assets at the end of the period, but such a calculation will be less accurate.
Both the profitability of own funds, and all other profitability indicators are most often studied in dynamics. This is due to the fact that normative values are not set for this group of indicators. In addition to studying the dynamics within one enterprise, it is possible to make comparisons with similar coefficients of other enterprises, as well as with values that are characteristic of a particular industry.
Of particular note is the fact that the return on assets and equity are usually subjected to another type of analysis - factorial. Its essence is to determine the isolated influence of certain factors on each of these coefficients. Through simple transformations, it can be concluded that the efficiency of the use of assets depends on their turnover and profitability of sales, and the return on equity of the owner is also affected by the level of coefficient of financial dependence.