For every entrepreneur, there are several basic indicators of business performance. Profit is just one of them.
It is critically important for people who start their own business to know how to calculate profitability. Otherwise, a seemingly successful enterprise may be unprofitable.
Online enterprise profitability calculator
What is profitability in simple words
Profitability is a reflection of the profitability of a businessman’s actions. Essentially, the concept implies the difference between expenses and income.
The expense part is associated with the costs of all types of resources, including labor, as well as depreciation - wear and tear of equipment during its operation. Income item is all the money received by an entrepreneur for the sale of goods and services.
Types of profitability
The types of profitability are determined by the direction of the enterprise's activities.
In economics, it is customary to distinguish the following types:
- goods and services - the difference in resource costs and sales income, sometimes calculated for a specific product;
- enterprises – accounting of all cash flows of an enterprise, used to assess the value of a business;
- assets – completeness and correct use of business units.
Calculating profitability in order to clarify the balance sheet is important not only for a business owner who wants to evaluate his asset, but will also be required when selling a business and wanting to attract third-party sources of financing.
Profitability indicators
In order to get the most complete picture of business profitability, it is recommended to analyze several indicators. This way you can take into account more factors and see the situation from different angles.
Key indicators include:
- assets;
- products;
- sale of goods and services;
- employees;
- capital, including investments.
Depending on the specifics of the business, other profitability indicators are also used, but even analyzing the above is enough to determine the current situation and the level of the trend.
How to calculate profitability
Profitability is determined using special formulas. The data used is taken from the books of account.
The key parameters required for substitution are:
- profit - the difference between income and expenses, before taxes;
- the value of assets on the company's balance sheet.
The formula is based on the fact that the first indicator is divided by the second, and the resulting result is multiplied by one hundred percent.
Sales return formula
Return on sales is the size of the markup that is added to the cost of a product when it is sold to an intermediary or the end consumer.
The formula is based on the ratio of profit to revenue multiplied by one hundred percent.
This parameter shows what part of the profit is in the total revenue from the product. This is important, because if it is low, it means the owner’s income is low.
Sales profitability is easy to calculate for small businesses or specific departments. When analyzing the efficiency of large companies, the indicator is rarely analyzed.
Product profitability formula
It is important to determine the profitability of products, since the main task of a business is to make a profit from the goods and services sold. The formula is based on the ratio of net profit and cost.
The calculation cycle is as follows:
- A certain amount of finished goods is taken.
- A time period for its implementation is determined, which is especially important for perishable items.
- The cost of production is determined, that is, how much money was spent on creation.
- After sales, the net profit indicator is calculated - income minus costs.
The last two parameters are inserted into the formula, and the indicator is measured.
Production profitability - formula and calculation example
The profitability of production allows not only to assess the current state of affairs at the enterprise, but also to determine the prospects for the growth and development of the company.
The calculation formula is identical for all types of business, regardless of the area of activity.
To calculate the indicator, you need to divide the production volume of profit by costs. Next, the indicator is multiplied by one hundred percent.
Let's look at an example that characterizes the calculation:
- revenue from product sales amounted to 100,000 rubles;
- labor costs, raw materials, trade costs - 60,000 rubles;
- the profit is correspondingly equal to 40,000 thousand.
When substituting the data into the formula, the yield will be 66%.
Formula for calculating the profitability threshold
The profitability threshold is an indicator at which the enterprise will not be unprofitable, but will not make a profit.
This parameter is important for entrepreneurs in order to determine the minimum sales level that must be exceeded in order not to go into the red.
The calculation is made using two formulas:
- Definition of margin. Subtract the company's variable costs from revenue, then multiply the difference by one hundred percent;
- Profitability rate. The ratio of fixed costs to margin.
Thus, the key concepts influencing this indicator are:
- markup on the product when selling it;
- expenses for fixed and variable costs.
Return on current assets
Assets are the most important element of any business. It is on the competent and full use of existing units of employees, equipment and premises that the entrepreneur’s income will depend.
Calculating the return on current assets is one of the most common methods for assessing the value of an enterprise. Simply put, this analysis provides insight into how much money a particular person or piece of equipment is bringing in or taking away.
If the parameter is below the zero norm for all assets, the company is unprofitable, since the available resources do not bring real profit.
ROI Calculation Formula
Calculating the return on investment is important when analyzing the effective use of funds raised for a project.
The simplest calculation formula is: the ratio of profit to investment multiplied by one hundred percent.
To obtain such a parameter as profit, the cost is deducted from the total income for the billing period.
Negative profitability
If after the calculations the parameter turns out to be negative, then this is a direct indicator of the unprofitability of the enterprise. This indicates, first of all, that the businessman’s income is lower than the basic expenses. The economic position of such a person is precarious.
Gross Margin
Gross profitability reflects how much profit each ruble received from the sale of goods and services brings.
Most often, accountants are involved in calculating gross profitability. They have a special counting scheme.
Operating profitability
Operating profitability includes calculated returns on administrative and other expenses, sales and assets. That is, it is a reflection of aggregate data and provides the most accurate reflection of the state of affairs in the company.
Ways to increase enterprise profitability
If the analysis provided disappointing results, then the entrepreneur needs to take measures to increase profitability.
Before starting to take action, it is recommended to track the dynamics over several periods of time, as factors such as:
- seasonality;
- emergence of competitors;
- rising prices for raw materials and labor in the region.
The main ways to increase profitability include:
- Improving the quality of the manufactured product in order to increase the sales market.
- Development of a marketing company, including advertising, search for new sales channels.
- Reducing costs without compromising quality, for example, upgrading equipment or attracting highly qualified personnel to replace several people without a specialty, or reducing salaries.
An entrepreneur can make an assessment on his own using an online calculator if he knows the formula and initial data. It is also permissible to involve third-party specialists.
Many individual entrepreneurs and managers of small businesses evaluate the effectiveness of their business activities by a simple trade margin. Simply put, having purchased a batch of goods for 100 rubles. per unit, and having sold at 150, they consider that they have received a net profit of 50%.
Perhaps, to evaluate such operations of ordinary resale, this indicator, which, by the way, is called profitability of product sales, and can tell something about the return on invested capital, but can such a business really be called serious? Indeed, one fine day, if there is a sharp drop in demand for a product being sold or if a low-quality batch is purchased, the business will definitely stop due to a lack of working capital.
How to find out what share in the formation of profit do transportation costs have and what price should they be attributed to - purchase or sales? What borrowed funds were involved and how were they reflected in the final result? What impact will interest on loans have on future financial performance? What are the overhead and operating costs and are they included in the profit? How to calculate production profitability?
And such questions arise even when carrying out simple purchase and sale transactions. How then to analyze the financial and economic activities of a serious trading or manufacturing company that has a large volume of current operations, attracts investments and loans, invests in working capital and expansion of production?
Why is calculation necessary?
An entrepreneur who wants to seriously run his business, successfully develop and expand it, must constantly and scrupulously conduct the most thorough analysis of economic performance, identify factors influencing an increase or decrease in profits, and look for ways to overcome problems. There are time-tested characteristics and techniques for such analysis.
The main economic indicator characterizing the commercial success of an enterprise is is, of course, profit, or the excess of its income over expenses. But the absolute value of profit says little about business performance. It’s one thing: a million rubles earned by a tiny company of three people working in a small office occupying one room, and quite another thing - a large plant or factory with multi-million dollar fixed assets. In the first case, we can talk about super-profits, in the second - about sliding towards the loss-making threshold.
That is why the main indicator of economic efficiency is not the absolute value of net profit, but its ratio to various types of costs involved in its creation. They're called profitability ratios and allow us to identify both factors both increasing profitability and hindering it. These characteristics are the main tools for economic analysis of business activities, which allow one to assess the investment attractiveness and creditworthiness of a company.
When issuing a loan, any bank will study first of all the company’s profitability indicators, and an investor planning to finance a new project will study the profitability of a business idea, that is, both will be interested in the possibility of a quick return on their investments and the risks associated with it. Many business counterparties will also invariably be interested in these characteristics in order to determine the reliability of the business partnership.
In the most general sense, profitability ratios make it possible to see in numerical terms the share of profit received by an enterprise over a certain period of time in each ruble spent to extract it. Simply put, if a company’s profitability is, say, 20%, this means that in every ruble it earns, the share of net profit is 20 kopecks.
Formulas and calculation examples
For trade enterprises, both retail and wholesale, the most important parameter showing the share of profit in total sales is:
Return on sales = Net profit/Revenue.
Companies engaged in the production of any product must take into account the effectiveness of financial investments in the production process using such an indicator as:
Production profitability = Sales profit / Production costs.
One of the most important coefficients showing the efficiency of using working capital and expressing the measure of the company’s profitability for each ruble invested in the formation of its assets is:
Return on Assets = Net Profit / Assets.
In all these and subsequent formulas:
- - the difference between revenue and operating costs, i.e. profit before tax.
- Production costs- the sum of the cost of fixed assets and working capital.
- Net profit- funds remaining with the company from the income received, after deducting all costs, production costs, taxes, interest on loans.
- Revenue- the total amount of money received as a result of economic activity from the sale of products, sale of goods or services, investments, sale of securities, lending, etc.
- Assets- the total value of the company’s property, cash, inventories, accounts receivable, fixed assets.
- Net assets- the difference between the value of all assets and the amount of debt obligations, or liabilities. The final value of the third section of the balance sheet.
What influences this indicator?
As can be seen from the calculation, despite the increase in the company's net profit, the increase in investments in production and working capital, its profitability is falling. The reason for this in this case is the growth of non-current assets. And it’s good if it is due to long-term investments, which in the near future will begin to generate stable income. Or the acquisition of intangible assets, for example, licenses for the production of new types of products, which will soon provide additional profit.
If this decrease is associated with an unreasonable increase in fixed assets not involved in production, then this indicator will continue to reduce the profitability of the enterprise’s assets. Or in the case when the analysis shows an increase in the costs of repairing means of production - this is a signal that it is necessary to replace the equipment.
In general, the profitability of an enterprise is influenced by many factors, both internal and external:
- External, subjective: market conditions, inflation rate, state tax policy, competitive pressure.
- Internal, or subjective: volume of assets, production assets, turnover; technical equipment, and many others.
All of them act either directly or indirectly, affecting both sales volume and cost levels. A thorough analysis of the impact of each of them on the profitability of the enterprise will allow it to be increased by improving production, stimulating product sales, increasing efficiency and reducing unjustified expenses.
An enterprise that has fixed assets (structures, equipment, machinery) is forced to charge depreciation on them due to wear and tear. Read articles from our experts about what it is, why a company is needed and how it is taken into account when.
Profitability analysis by link
In conditions of maintaining the average market competitive price for products, there is only one way to increase profitability - reducing unjustified costs in all parts of the production chain and sales of the finished product. Unjustified in this case will be variable costs that do not directly participate in the formation of the cost of production and the formation of its price, but occasionally reduce the profit from its sale (read about how to calculate profit from sales and what are the methods for increasing the indicator).
It is for such an analysis that there are separate profitability ratios, showing the influence of each resource in creating profit. For a more in-depth analysis, you can use, for example, production efficiency coefficients such as:
- Profitability of fixed assets = Net profit / Cost of production assets.
- Return on current assets = Net profit / Current assets.
Another of the most important ratios showing the efficiency and turnover of investments in a company’s equity capital is calculated using the Dupont equation: return on equity = Net profit / Net assets.
It is the product of three coefficients - Net profit margin * Resource productivity * Capitalization, Where:
- Net profit margin = Net profit/Revenue. The company's ability to reinvest in increasing working capital.
- Resource efficiency = Revenue/Assets. Shows the efficiency of asset management by the company or the turnover of each ruble invested in assets over a certain period of time.
- Capitalization = Assets / Net Assets. Allows you to evaluate the effectiveness of borrowed funds or lending.
As an additional parameter when considering the efficiency ratio of debt capital in relation to equity, a simple formula is often used: leverage = Borrowed funds / Net assets.
In contrast to Return on Assets, Return on Equity shows the proportion of debt in increasing the company's profitability. It shows the effectiveness and attractiveness of lending to a given enterprise for investors or banks. In some cases, it can show the management of an enterprise that even if there is sufficient equity capital, it is better to attract additional financing through borrowed capital if this increases the efficiency of equity capital.
Among the many coefficients, the one that shows the break-even point of the enterprise, below which the total costs will begin to exceed the total income, also plays a significant role: Profitability threshold = Fixed costs / (Revenue – Variable costs). It can be calculated both for the company as a whole and for individual types of products.
In addition to these main indicators, other profitability ratios can be used to analyze the economic activity of an enterprise: personnel, contracting services, investments, trade margins, total and net assets, and others.
It must be said that excessively inflated profitability values show the company’s greater efficiency, but indicate the high risks accompanying its commercial activities. Thus, an enterprise that has received a large loan will have a high return on assets, but if it is used ineffectively, it will very soon reach the profitability threshold and go into the red. Each type of business has its own optimal indicators that indicate its stable development.
Generally these values should not exceed 30~40%. In addition, they may be subject to seasonal changes, in the case of, for example, tourism businesses. During certain periods of the year, associated with the period of tax contributions to the budget, they may decrease, and for agricultural production they may increase. That is why the results of economic activity should be assessed both for short-term periods and averaged over long periods.
Profitability, simply put, is the percentage of profit divided by cost. How to calculate profitability itself? We divide the net profit by All expenses, subtract one from the result and multiply the remainder by 100%. Invested 1084 during the reporting period, by the end of it the account grew by 1240.31 - profitability ratio 1240.31/1084 = 1.1442; (1.1442 – 1)x100% = 14.42%. This is profitability for the reporting period.
Profitability as a tool of economic analysis
The dynamics of profitability as a way to assess the state of affairs was used long before the advent of economics as a science, intuitively. The enterprise is in debt all around, but profitability is growing - the business is firmly established, they will endure, repay the loans and rise. Profitability is stagnant - not very good, they have completely occupied their niche. You need to think about how to expand, otherwise you can collapse from a small push. Profitability falls - they go to collapse, even if now they are carrying bags of gold into their basements.
However, in practice there were incidents that were inexplicable from the point of view of such a “natural” approach. So the question is: “What is profitability based on?” has long been the most pressing issue in the economy.
Where does profitability come from?
David Ricardo was the first to understand this when he introduced the concept of surplus value: no one takes anything away from anyone, no one wants to ruin anyone in order to profit themselves. But during the production process, the value of all costs increases and is invested in a product ready for sale. The overriding task of the economy is to achieve a fair distribution of this excess value, surplus value, among all members of society.
Karl Marx finally figured out profitability by thoroughly examining the very mechanism of the emergence of surplus value and the basis of profitability. They are in a specific product that can create new value without being consumed. This product is endowed with intelligence, creativity and will. Its name is labor force . It was with this circumstance in mind that if it was necessary to calculate profitability, formulas for different cases were derived in the most natural way.
Profitability in this context is already a fundamental, global factor. It shows how capable a particular business entity is of replenishing public reserves without infringing on itself. The modern economy, aimed at systematic development, pays special attention to profitability. A whole ocean of scientific works is devoted to the methods and features of calculating profitability and analyzing its dynamics for different cases.
How to Determine Profitability
In any case, profitability can be determined both directly, by direct indicators, and by the balance sheet. It is sometimes necessary to determine profitability from the balance sheet if you need to assess the state of affairs of a counterparty. Business agreements generally provide for the possibility of reclaiming a partner's balance, and the law provides for such a possibility.
Let's move on to practical cases.
Company
The enterprise is the basis of the economy, because It is in the process of producing goods and services that surplus value is created. The calculation of profitability begins with the enterprise. How to calculate the profitability of an enterprise as a whole? According to aggregated indicators, as stated above: we divide the net profit for a certain period of time by all expenses for the same period. The result, if necessary, is expressed as a percentage.
On the balance sheet, profitability is calculated according to Form 2: we sum up all the costs of production (item 20 + item 30 + item 40), and divide the balance sheet profit by the resulting amount. This is how the profitability ratio of the enterprise is obtained. We subtract one from it and multiply the remainder by 100%. We obtained profitability as a percentage for the reporting period.
Please note: it is impossible to divide the profit from sales (PR), as is sometimes recommended, into the costs of Article 50 of Form 2. In this way, the core activity profitability ratio (CRRO) is obtained. Even if the enterprise produces only one type of product, this is a private indicator.
To obtain PB, balance sheet profit, you need to add other profit (PP) and non-sales income/expenses (PVN) to PR.
Let's move on to the production levels
Whatever the profitability turns out to be, it needs to be broken down into links: production, assets, sales, and analyzed over time, comparing it with several past reporting periods. If an enterprise produces several types of products, analysis is done for each type separately.
Analysis by links allows you to determine:
- With a positive overall result, where there are hidden reserves, what needs to be improved in order to increase production efficiency, where there are gaps that need to be filled in order to avoid difficulties in the event of worsening external conditions. For example, assets in need of modernization may not clearly show themselves: virtuoso turner Uncle Vasya sharpens and sharpens himself on an old 1K62, better than Japanese robots do. But Uncle Vasya retired, or the bed of the veteran machine cracked, the domino principle worked, and immediately there were a lot of problems. But if the return on assets is near zero (a robot, with large initial costs for it, is cheaper to operate than a highly skilled worker with a long length of service), then this is a call: Uncle Vasya, for all his invaluable merits, it’s time to prepare a replacement .
- If profitability stagnates, the same analysis will show where the “swamp” is. Let’s say the marketing department sells well, there is a profitability of sales (see below), but the assets are “slowing down”. Based on a comparison of profit with overall profitability, we consider whether it is possible to get out on our own, or whether we need to take out a loan for modernization, and what conditions will be acceptable.
- And finally, if profitability is steadily falling, then after analysis you can answer the question: is it worth continuing? Maybe, despite all our skill and effort, the industry itself is becoming obsolete (card payphones, barely having appeared on the streets, immediately disappeared - everyone got mobile phones), and it’s better to sell everything while they are still buying it, and invest in something new?
The main link: the production process
At first glance, calculating the profitability of production is very simple: we divide the balance sheet profit of the industrial enterprise by the average cost of fixed assets, fixed and working capital. As a result, we get how many kopecks (rubles) of profit we get from one ruble of production costs, which will be the percentage expression of production profitability. By the way: there are still a few states left whose monetary units do not have decimal division. Let's sympathize with the accountants and economists there...
Average cost means averaged over time, and not by category or amount of costs. That is, to calculate the average cost of fixed assets, it is necessary to take into account depreciation expenses, wear and tear rates, etc. For working capital, respectively, loan payments, interest on commercial loans provided by us, etc. So the fundamentally simple calculation of production profitability is in fact perhaps the most labor-intensive of practical economic tasks.
Using the balance sheet, it is also possible and necessary to calculate the profitability of production, but only for yourself. By law, counterparties are required to provide only aggregated indicators, while the delicate accounting “kitchen” belongs to the category of trade secrets, which are protected by the same law.
Production foundation: assets
Having sorted out production, we need to find out whether our assets are performing well. To figure out how to calculate return on assets, you need to know the following:
The ratio of net profit to total assets will give the return on assets (RA) directly, without a coefficient. We multiply RA by 100% to obtain return on assets as a percentage. In money - how many kopecks a ruble gives us.
Note: Return on Assets is a very nuanced and rigorous metric. On the one hand, it is undesirable to “bully” it too much: in the modern world, solid reserve funds, financial reserves, are necessary. On the other hand, if RA is low, then it means that capital is not working and is being eaten away. To analyze the RA with recommendations for further actions, it is better to turn to good economists. It is very difficult to take into account all external factors on your own.
Result of activity: sales
Having figured out whether everything is in order “on the farm”, you can ask the question: are we selling what we do well? To do this, you need to calculate the return on sales. We have already received all the necessary data for this in the course of previous calculations, so calculating the return on sales ratio (RPR) is quite simple: we divide the net profit from sales (we received it when calculating return on assets) by sales revenue (sales volume). We subtract one from the KRP, multiply by 100% - we get the return on sales as a percentage.
According to the balance sheet, KRP = item 50 f.2/item 10 f.2.
As we see, profitability is not at all the “gain” that spontaneous small traders operate. Based on profitability indicators, one can judge not only how profitable the enterprise is, but also what needs to be done so that the income does not dry up.
Profitability is the most important indicator in assessing the activities of an enterprise.
It is characterized by a state where the use of funds leads not only to the enterprise covering expenses, but also to generating income.
The profitability of an enterprise is assessed by both absolute and relative indicators.
Absolute indicators are expressed in profit and are determined by value, that is, the national currency.
Relative indicators are measured as percentages and characterize profitability.
Profitability indicators are influenced by inflation processes to a lesser extent in relation to the amount of profit.
This is due to the fact that profitability is determined by different ratios of profit and capital or profit received and production costs.
Profitability is calculated regardless of the type of activity of the enterprise. Profitability indicators are the assets of the enterprise, whose profitability represents the remaining income of the enterprise.
It is divided by the average value of assets over the past period. The number obtained after division must be multiplied by 100%.
Product profitability formula: return on assets = enterprise profit: the amount of assets in the average annual indicator X 100%.
The resulting number characterizes the income received from each ruble used to create the assets of the enterprise. The assets of an enterprise and their profitability show the profitability of the enterprise for a specific time.
Thus, the profitability of products is determined by a formula abbreviated as follows: RP = P/PZ x 100%
From the above it follows that RP is an indicator of production profitability, PZ-production costs, P-profit, calculated based on production volume.
Product profitability is determined by existing calculation limitations, let's look at them:
- Only quantities that correspond to each other can be correlated;
That is, only those costs that are incurred to obtain profit in a specific volume are subject to accounting. - The profitability of products sold is calculated in a similar way: the calculation includes indicators of expenses that are written off for sale and reduce profit from sales;
- Before calculating the profitability of production using the formula, it is necessary to sum up all the costs incurred during the production process;
- Profitability of production can be calculated after taxation of enterprises or before it.
Examples of calculations from practice
For example: an enterprise produces diapers and diapers for children. Total revenue for last month amounted to 400 million rubles.
The cost of products sold, including costs of commerce and staffing of the enterprise, is 240 million rubles.
The main indicators have been indicated, now the question arises of how to calculate the profitability of goods produced by a particular enterprise?
First you need to find the income for the previous month. The full cost is subtracted from all revenue, resulting in 160 million rubles. We apply the basic formula: 160/240x100 = 66.66%.
It turns out that the profit received from the enterprise from each ruble of production is in this case 66 rubles 66 kopecks. This is a good return on goods.
Why is it necessary to evaluate the profitability of goods? The presence of the following factors plays a role here:
- Competitiveness of the enterprise in the sphere of consumption;
- Production efficiency at the enterprise.
A decrease in the profitability of goods directly indicates a decrease in consumer demand for the products of a particular manufacturer, or low production efficiency at the enterprise.
Profitability can be calculated for several products belonging to a specific product group. And here we need to give another example:
The company produces three types of products with an average profitability of 30%. To calculate the profitability for each product, you need to use the basic formula, but in relation to each product separately.
To analyze and calculate the efficiency of an enterprise, a wide range of economic and financial indicators is used. They differ in the complexity of calculation, availability of data and usefulness for analysis.
Profitability is one of the optimal performance indicators - ease of calculation, availability of data and enormous usefulness for analysis make this indicator a must-have for calculation.
What is enterprise profitability
Profitability (RO – returnon)– a general indicator of the economic efficiency of an enterprise or the use of capital/resources (material, financial, etc.). This indicator is necessary for analyzing economic activities and for comparison with other enterprises.
Profitability, unlike profit, is a relative indicator, so the profitability of several enterprises can be compared with each other.
Profit, revenue and sales volume are absolute indicators or economic effects and it is incorrect to compare these data from several enterprises, because such a comparison will not show the true state of affairs.
Perhaps an enterprise with a smaller sales volume will be more efficient and sustainable, that is, it will bypass another enterprise in terms of relative indicators, which is more important. Profitability is also compared with efficiency(efficiency factor).
In general, profitability shows how many rubles (kopecks) of profit one ruble invested in assets or resources will bring. For profitability of sales, the formula reads as follows: how many kopecks of profit are contained in one ruble of revenue. Measured as a percentage, this indicator reflects the effectiveness of activities.
There are several main types of profitability:
- profitability of products/sales (ROTR/ROS – total revenue/sale),
- return on cost (ROTC – total cost),
- return on assets (ROA – assets)
- return on investment (ROI – invested capital)
- personnel profitability (ROL – labor)
The universal formula for calculating profitability is as follows:
RO=(Type of profit/Indicator whose profitability needs to be calculated)*100%
In the numerator, the type of profit is most often used profit from sales (from sales) and net profit, but it is possible to calculate balance sheet profit and. All types of profit can be found on the income statement (profit and loss).
The denominator is the indicator whose profitability needs to be calculated. The indicator is always in monetary terms. For example, find the return on sales (ROTR), that is, the denominator should include the sales volume indicator in value terms - this is revenue (TR - total revenue). Revenue is found as the product of price (P – price) and sales volume (Q – quantity). TR=P*Q.
Formula for calculating production profitability
Return on cost (ROTC – returnontotalcost)– one of the main types of profitability necessary for efficiency analysis. Cost profitability is also called production profitability, as this indicator reflects the efficiency of the production process.
Production profitability (cost) is calculated using the following formula:
ROTC=(PR/TC)*100%
The numerator contains profit from sales/sales (PR), which is the difference between income (revenue - TR - totalrevenue) and expenses (total cost - TC - totalcost). PR=TR-TC.
In the denominator, the indicator whose profitability needs to be found is the total cost (TC). The total cost consists of all the costs of the enterprise: costs of materials, semi-finished products, wages of workers and administrative and management personnel, electricity and other housing and communal services, shop and factory costs, costs of advertising, security, etc.
The largest share of the cost is made up of materials, which is why the main industries are called material-intensive.
Return on cost shows how many kopecks of profit from sales will be brought by one ruble invested in the cost of production. Or, measured as a percentage, this indicator reflects how efficient the use of production resources is.
Formula for calculating profitability on balance sheet
Many types of profitability are calculated based on balance sheet data. The balance sheet contains information about the assets, liabilities and equity of an organization.
This form is compiled 2 times a year, that is, the status of any indicator can be viewed at the beginning of the period and at the end of the period. To calculate profitability from the balance sheet, the following indicators are required:
- assets (current and non-current);
- the amount of equity capital;
- investment size;
- and etc.
You cannot simply take any of these indicators and calculate profitability - this is wrong!
In order to correctly calculate profitability, you need to find the arithmetic average of the amount of the indicator at the beginning of the current (end of the previous) and the end of the current period.
For example, find the profitability of non-current assets. The sum of the values of non-current assets at the beginning and end of the period is taken from the balance sheet and divided in half.
In the balance sheet of medium-sized enterprises, the value of non-current assets is reflected in line 190 - Total for section I; for small enterprises, the value of non-current assets is the sum of lines 1150+1170.
The formula for return on non-current assets is as follows:
ROA (in) = (PR/(VnA np + VnA kp)/2)*100%,
where VnA np is the value of non-current assets at the beginning of the current (end of the previous) period, VnA kp is the value of non-current assets at the end of the current period.
The return on non-current assets shows how many kopecks of profit from sales will be brought by one ruble invested in non-current assets.
Example of calculating production profitability
To calculate the profitability of production, the following indicators are required: total cost (TC) and profit from sales (PR). The data is presented in the table.
PR 1 =TR-TC=1500000-500000=1,000,000 rubles
PR 2 =TR-TC=2400000-1200000=1,200,000 rubles
Obviously, the second enterprise has higher revenue and profit from sales. When measured in absolute terms, the effect of the second enterprise is higher. But does this mean that the second enterprise is more effective? To answer this question, production is necessary.
ROTC 1 =(PR/TC)*100%=(1000000/500000)*100%=200%
ROTC 2 =(PR/TC)*100%=(1200000/1200000)*100%=100%
The profitability of production of the first enterprise is 2 times higher than the profitability of production of the second enterprise. We can confidently say that the production of the first enterprise is 2 times more efficient than that of the second.
Profitability, as an indicator of the efficiency of an enterprise, more accurately reflects the real state of affairs in production, sales or investment of the enterprise, allowing you to correctly respond to the current situation, in contrast to the use of absolute indicators, which do not give a complete picture.
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