# CALCULATION OF BUSINESS PROFITABILITY – THE FIRST STEP TO SUCCESS

The profitability of the company is a relative indicator of economic efficiency. This indicator is measured in percent. The calculation is made by dividing the profit by the amount of resources used. In other words, profitability illustrates the effectiveness of the use of property assets by a company. The calculation of this indicator allows us to estimate the amount of profit received for each ruble spent.

The level of profitability is determined by the cumulative effect of a number of factors, including the sources and capital structure, the structure of assets, the use of production resources, the price of working capital, the amount of revenue, the amount of expenses for the reporting period, and so on.

HOW TO CALCULATE THE INDICATOR?

To make an accurate calculation, use the following formula:

P = P / (OPF + OA), where P – the balance sheet profit, OPF – the average price of the main production fund, OA – the average price of current assets.

Balance profit is the profit before tax, the total profit that the company received on the total for the period.

To calculate this value, it is required to subtract the following indicators from the revenue received from the provision of services and product sales:

cost of goods;

management expenses;

selling expenses.

In addition, it is important not to forget to add income from non-operating activities. Indicators for calculating OA and OPF are taken from the form of the first “Balance Sheet”. The value of OPF is located in the “Fixed Assets” section, the value of assets is in the second section in the summary line.

Also in the process of analyzing the effectiveness of the calculation of the coefficients:

Profitability of sales – profit on sales, divided by the amount of revenue from sales.

profit from sales;

cost amount;

amount of revenue.

Assistance in the selection of financial services / organizations

The industry standard is 0-0.4, for trade – 0-0.3.

Analyzing the profitability ratio, it is required to estimate the structure of revenues and costs.

The amount of revenue is determined by objective and subjective factors. Objective factors are divided into external and internal. External – quality in comparison with the proposals of competitors, the situation on the market of materials, raw materials, semi-finished products, the rhythm of supply, compliance with all conditions of the contract and so on. Internal – the level of costs, production, rhythm of production, product quality, range and so on.

Subjective factors include the political situation in the country, features of the sphere of activity, anti-advertising and advertising, and moral factors.

Return on assets – net income divided by the value of assets.

The following indicators are used for the calculation:

total assets;

net profit.

This indicator reflects the ability of the company’s assets to generate profits, and also shows the effectiveness of the use of property. The decrease in efficiency reflects a drop in demand and a re-accumulation of assets. The standard for an industrial company is 0-0.1, for trade 0-0.05.

Return on investment – net income divided by equity and long-term liabilities.

To calculate a measure, you will need the following data:

the average level of long-term liabilities;

average level of own funds.

The standard for an industrial enterprise is 0-0.16, for a trading company – 0-0.07.

Return on current assets is net income divided by current assets. It shows the efficiency of OA distribution and reflects how much profit will be received from each ruble invested in assets. It also demonstrates the ability of an organization to provide the necessary amount of profit in relation to working capital. The higher the level, the more efficient the use of working capital.

The norm for an industrial company is 0-0.2, for a trading company – 0-0.08.

Return on equity (equity) is the net profit divided by equity. The indicator reflects the return on investment of shareholders of the enterprise from the accounting profit.

Standard for industry – 0-0.2, for trade – 0.06.

CALCULATION OF PROFITABILITY BY EXAMPLE

Consider how the calculation of the profitability of the enterprise on a specific example.

Suppose an enterprise plans to receive a cumulative value of the value of current assets in the amount of 50,000 rubles and production assets in the amount of 150,100 rubles. It is not planned to increase non-current assets.

As a result, the total value of assets under the plan should be 200,100 rubles. The value of the planned net profit should be 20 000 rubles. At the same time, for the billing period a profit of 20,200 rubles was received. That is, in comparison with the plan, the increase in profits reached 2,000 rubles.