# Profitability calculation

The problem of efficiency of commercial activity worries every Manager, because it is the owner of the enterprise is interested in the profitability of the business. Efficiency can be defined as the ratio between the result and the resources spent.

Performance indicators can be divided into forward and reverse. Direct performance indicators represent the output of which show what a standard unit of outcome obtained with a conventional unit costs to receive it. Reverse the indicators of effectiveness represent the coefficients of capacitance, which illustrate how unit costs necessary to obtain the conventional unit result.

One of the main indicators of efficiency of economic activity of the enterprise is profitability. Profitability indicators are less affected by inflation and are expressed in different profit and cost ratios. Profitability indicators are mainly measured in the form of coefficients.

Profitability

Profitability can be defined as an indicator of economic efficiency, reflecting the degree of efficiency of the use of material, monetary, industrial, labor and other resources.

Profitability indicators are divided into different groups and calculated as the ratio of the selected meters.

The main types of profitability are the following indicators:

Return on assets.

Profitability of fixed assets.

Profitability of sales.

Return on assets

Return on assets is a financial ratio that shows the profitability and efficiency of the enterprise. Return on assets shows how much profit the organization received from each ruble spent. Return on assets is calculated as the quotient of the net profit divided by the average amount of assets multiplied by 100%.

Return on assets = (Net profit / Average annual value of assets) x 100%

The values for calculating the return on assets can be taken from the financial statements. The net profit is indicated in the form №2 “income Statement” (new name “Statement of financial results), and the average value of assets can be obtained from the form №1 “Balance sheet”. For accurate calculations, the arithmetic mean of assets is calculated as the sum of assets at the beginning of the year and the end of the year divided by two.

Using the return on assets indicator, you can identify the differences between the projected level of profitability and the real indicator, as well as understand what factors influenced the deviations.

Return on assets can be used to compare the performance of companies in one industry.

For example, the value of the company’s assets in 2011 amounted to 2,698,000 rubles, in 2012 – 3,986,000 rubles. Net profit for 2012 is 1 983 000 rubles.

The average annual value of assets is 3 342 000 rubles (the arithmetic average between the indicators of assets for 2011 and 2012).)

Return on assets in 2012 was 49.7%.

Analyzing the obtained indicator, it can be concluded that the organization made a profit of 49.7% from each ruble spent. Thus, the profitability of the enterprise is 49.7%.

Profitability of fixed assets

The profitability of fixed assets or the profitability of fixed assets is the private division of net profit to the value of fixed assets multiplied by 100%.

Profitability of OPF = (Net profit / Average annual value of fixed assets) x 100%

The indicator shows the real return on the use of fixed assets in the production process. Indicators for calculating the profitability of fixed assets are taken from the financial statements. Net profit is indicated in the form №2 “income Statement” (new name “Statement of financial results), and the average value of fixed assets can be obtained from the form №1 “Balance sheet”.

For example, the value of fixed assets of the enterprise in 2011 amounted to 1 056 000 rubles, in 2012 – 1 632 000 rubles. Net profit for 2012 is 1 983 000 rubles.

The average annual cost of fixed assets is 1 344 000 rubles (the arithmetic average of the cost of fixed assets for 2011 and 2012).)

Profitability of basic production assets equal 147,5%.

Thus, the real return on the use of fixed assets in 2012 amounted to 147.5 %.

Profitability of sales

Return on sales shows how much of an organization’s revenue is profit. In other words, the profitability of sales is a coefficient that illustrates what proportion of profit is contained in each earned ruble. Return on sales is calculated for a given period of time and is expressed as a percentage. By means of profitability of sales the enterprise can optimize price policy, and also the costs connected with commercial activity.

Return on sales = (Profit / Revenue) x 100%

The values of return on sales are specific for each organization, which can be explained by the difference in competitive strategies of companies and their range.

Different types of profit can be used to calculate the profitability of sales, which leads to the existence of different variations of this coefficient. The most commonly used are return on sales calculated by gross margin, operating return on sales, return on sales calculated by net profit.

Gross profit margin = (gross profit / Revenue) x 100%

The gross profit margin is calculated as the private profit obtained by dividing gross profit by revenue multiplied by 100%.

Gross profit is determined by subtracting the cost of sales from revenue. These indicators are contained in the form №2 “Income statement” (new name “Statement of financial results).

For example, the gross profit of the company in 2012 amounted to 2 112 000 rubles. Revenue in 2012 is 4 019 000 rubles.

Gross profit margin is 52.6%.

Thus, it can be concluded that each earned ruble contains 52.6 % of gross profit.

Operating return on sales = (Profit before tax / Revenue) x 100%

Operating return on sales is the ratio of profit before tax to revenue, expressed as a percentage.

Indicators for the calculation of operating profitability are also taken from the form №2 “Income statement”.

Operating margin indicates the percentage of profit contained in each ruble of revenue received minus interest paid and taxes.

For example, profit before tax in 2012 is 2 001 000 rubles. Revenue in the same period amounted to 4 019 000 rubles.

Operating margin is equal to 49.8 per cent.

This means that after deducting taxes and interest paid, each ruble of the proceeds contains 49.8% of profit.

Net profit margin = (Net profit / Revenue) x 100%

Net profit margin is calculated as the quotient of net profit divided by revenue multiplied by 100%.

Indicators for calculating the profitability of sales on net profit are contained in the form №2 “Income statement” (new name “Statement of financial results).

For example, the Net profit in 2012 is 1 983 000 rubles. Revenue in the same period amounted to 4 019 000 rubles.

Net profit margin is 49.3%. This means that in the end, after paying all taxes and interest, 49.3% of profit remained in each ruble earned.

Profitability analysis

Profitability of sales is sometimes called the norm of profitability, because the profitability of sales shows the share of profit in the revenue from the sale of goods, works and services.

To analyze the coefficient characterizing the profitability of sales, it is necessary to understand that if the profitability of sales decreases, it indicates a decrease in the competitiveness of products and a drop in demand for it. In this case, the company should think about carrying out activities that stimulate demand, improve the quality of the proposed product or the conquest of a new market niche.

As part of the factor analysis of profitability of sales, the impact of profitability on the change in the price of goods, works, services and changes in their cost is considered.

To identify trends in the profitability of sales in the dynamics of the need to allocate the base and the reporting period. As a reference period, you can use the indicators of the previous year or the period in which the enterprise received the greatest profit. The base period is necessary for comparison of the received coefficient of profitability of sales for the accounting period with the coefficient accepted as a basis.

The profitability of sales can be increased if you increase the prices of the proposed range or reduce the cost. To make the right decision, the organization should focus on such factors as: the dynamics of market conditions, fluctuations in consumer demand, the ability to save internal resources, evaluation of competitors and others. For this purpose, the tools of commodity, price, marketing and communication policy are used.

It is possible to allocate following basic directions of increase of profit:

Increase in capacity.

Using the achievements of scientific progress requires investment, but can reduce the cost of the production process. Existing equipment can be upgraded to save resources and improve operational efficiency.

Product quality control.

Quality products are always in demand, so if the level of profitability of sales is insufficient, the company should take measures to improve the quality of the products offered.

Development of marketing policy.