How to calculate the profitability of the enterprise
Being engaged in business, it is important to understand how your activity is effective. It is impossible to determine by this profit margin alone. After all, in order to make a profit, you must first use any resources, be it money, equipment, and so on. Therefore, what you invest, also can not be discounted. The profitability index takes into account both profits and costs, so with its help you can most accurately determine how efficient your business is.
In simple terms, profitability is a ratio of profits and costs, expressed as a percentage. Profitability is a relative indicator, and it is necessary for the analysis of economic and economic activity of any enterprise. It is because of such relativity that the profitability indicators of two or more different enterprises can be compared with each other and thus be understood which of them is more effective.
Profitability can be influenced by a variety of factors: the sources of capital, the value of assets / working capital, the amount of revenue, and much more. Profitability will allow us to see how much profit we received from each dollar / ruble spent (or other currency you work with).
To get an indicator of profitability, you need to divide the net profit by the value of all expenses. The length of time for the first indicator, and for the second, of course, we take the same. The formula for calculating profitability is as follows:
RP = BP / SA * 100%. We decrypt:
RP – enterprise profitability;
BP – the amount of retained earnings. To calculate it, you need to take the amount of revenue for a certain period of time, subtract the cost of production and various organizational costs.
CA – the value of assets. Here you need to add the value of production assets, current assets and non-current assets.
Profitability alone can say little about the development of an enterprise. Judging the performance of a business by the number alone will not be entirely reasonable. It is necessary to consider this issue in the complex. Therefore, it is important to calculate and analyze such types of profitability as profitability of production, return on assets and return on sales. Let us dwell on the first.
No production company can do without this indicator. This is the most important characteristic of production efficiency. The stages of calculating the profitability of production are as follows:
1. We take the balance sheet and “get” from there the balance sheet profit.
2. Calculate the average annual value of fixed assets. To do this: add the fixed assets as of the 1st day of each month, add the fixed assets at the beginning and end of the year, then divide the resulting amount by two. The total number is divided by 12 – so many months a year. If you take for the reporting period not a year, but a different period, then divide it by the corresponding number of months.
3. From the balance sheet of the enterprise, we again “get” the average cost of working capital.
4. Finally, we turn to the calculation of the profitability of production. To get this figure, it is necessary to divide the balance sheet profit by the average annual cost of working capital.
The return on assets allows you to see how well the capital of the enterprise works. The return on assets should not be very low – as this will indicate that capital does not work, but it should not be very high, as it can cause a lack of reserve capital, which is also not good.
Return on assets is calculated as follows:
1. We pull out from the financial statements the amount of sales for the reporting period.
2. Determine the cost of production.
3. We calculate the transaction costs for the same period.
4. We add the amount of tax payments that are paid to the budget to the obtained cost and cost indicators. From the total sales we deduct the amount received. We have a net profit.
5. From the financial statements pull the amount of total assets. We divide the net profit by total assets – this is your return on assets.
If the profitability of production is at a good level, and the return on assets is also optimal, but the overall profitability of the enterprise disturbs you, it may be worth looking for a problem in sales.
Determine the profitability of sales:
1. Calculate the revenue from the sale of products for the reporting period.
2. We get from the accounting documentation net profit.
3. We divide the amount of net profit by sales proceeds – and this is your profitability of sales.
To more fully see the picture of the current state of affairs, compare the profitability of sales for one reporting period with the same for another reporting period. If the profitability of sales is constantly declining, or there has been a sharp decline in one of the periods, this is a serious reason to conduct a deep economic analysis.