If you are looking for an investor for your project or have already been working quite a bit and suddenly decided to take out a loan (or again need an investor for expansion), then there is a high probability that you will be faced with the question of how to calculate the profitability of the organization you head.

Moreover, this question may not even arise from you, but from a bank or investor - and here you will have to urgently figure out what is the calculation of the profitability of an enterprise, what is the level of profitability in general, what are the profitability indicators and what does all this mean.

Let's figure it out together.

What is profitability anyway?

Profitability is an indicator of economic efficiency, expressed as a percentage. The ratio of the useful end results of the system to the amount of resources required for its operation.

Seems too nerdy?

In fact, everything is simple: something finite and useful, divided by all the resources that went into the production of this finite and useful. Of course, both indicators must be measurable and expressed in the same equivalent - usually in money.

The simplest example is return on sales (it is also called the net profit ratio or return on turnover for a specific period).

The return on sales formula looks like this:
Return on sales = (Net profit / Enterprise revenue) * 100%

This ratio clearly shows how much net profit the company has from each ruble of sales, that is, it demonstrates the company’s pricing policy, as well as how effectively it controls costs.

What is enterprise profitability?

What do those who ask you to calculate the profitability of an enterprise want to achieve from you?

This indicator will demonstrate how effectively the organization as a whole operates its assets, as well as working capital and equity. Essentially the same thing: how much profit is generated for every ruble spent.

The percentage of profitability depends on many factors: the availability and cost of assets, sources of capital of the organization, the price of working capital, the amount of revenue and expenses.

The following judgment is generally accepted: if an organization has a profit, then it is profitable. If not, then no.

But in reality everything is a little more complicated.

Calculation of profitability taking into account inflation

There is such a thing as inflation. And with the same amount of profit in different reporting periods, the indicators of the real profitability of the enterprise can differ greatly.

There are different measurement values ​​here: absolute indicators (just the profit figure for the period) and relative indicators (the ratio of profit fluctuations in relation to production costs, that is, costs and markups on raw materials and other expenses are also taken into account here).

Example of profitability calculation

The company Berezovyi Nanovenik LLC for two different periods (let’s say a month long) received the same profit in absolute terms - 1,000,000 rubles. It would seem great, this company has a stable profit.

However, in the first period, with a profit of 1,000,000, its revenue was 2,000,000, and in the second period it was already 3,000,000 (sales people began to give customers more discounts, one of the channels for attracting customers became more expensive, or something else that resulted in the need to increase number of transactions). Plus, the same inflation makes its own adjustments to this million.

Accordingly, in relative terms, the profitability of this company began to decline, since resources and working capital for the same amount of profit must now be spent one and a half times more. And only a relative indicator provides clarity of the real state of affairs in dynamics.

Now let’s complicate the example a little: this profit of a million in absolute figures has been observed not for two months in a row, but for six, while the turnover with the same sales plan of 1,000,000 smoothly reached the 6 million mark.

Then, already in relative terms, the profitability of sales is definitely falling, that is, the company is gradually increasing costs and in order to get the same profit, something will soon have to be changed, since the management course is clearly wrong and any force majeure can hit a company with low profitability hard.

That is why, in order to assess the real financial affairs of an enterprise, it is necessary to measure and track both of these indicators: both absolute and relative.

If we talk not about the profitability of individual business processes (for example, there are separate formulas for product profitability, personnel profitability, asset profitability, and so on), but about the organization in general, then the formula for calculating profitability looks like this:

Enterprise P = (BP / (OPF + OA))*100%
Where:
BP is the accounting profit for the reporting period;
OPF – the average value of the organization’s fixed production assets for the reporting period;
OA is the average value of current assets for the same period.

Explanation for calculations

Accounting (balance sheet) profit is the company's profit for the reporting period before taxes.

To get this figure, you need to subtract the cost of goods/services sold from revenue, subtract administrative and other expenses. Ask your accountant, have him give you the figure for balance sheet profit before tax from form No. 2, there is a whole separate line for it.

Fixed production assets (FPF) can be material or intangible. These are all the means of labor that you use to produce a product/service. These include buildings/structures, machines/machines, vehicles, tools/equipment, archives/libraries/databases, electrical networks/gas pipelines, and so on.

To obtain this figure, it is necessary to add the size of the general fund at the beginning of the period to the size of the general fund at the end of the reporting period and divide this amount by 2. In the balance sheet, the value of the general fund is listed in the line “fixed assets”.

TO current assets (OA) include material working capital (which is completely spent during the production cycle), cash (cash in hand, balance on the company's current account/accounts for the period) and funds in settlements (accounts receivable).

To obtain this figure, it is necessary to add the amount of operating assets at the end of the reporting period to the amount of current assets at the beginning of the period and divide this amount by 2.

We plug everything into the formula and find the company’s profitability.

For clarity, let's give another example.

Final example of calculating the profitability of an enterprise

The Edren-Batonych bakery turned to a potential investor for money to replenish working capital in connection with the desire to open a new workshop. The investor, of course, turned to financiers with the question “how to correctly calculate the profitability of an enterprise in order to assess the risk of non-return of the money invested in this business?”

The latter provided him with the following calculation:

The bakery earned 350,000 rubles in profit (before tax) in the first quarter.

The price of its equipment, ovens, carts, dough mixers and other things at the beginning of the period amounted to 3,000,000 rubles, and at the end of the period it amounted to 3,400,000 rubles (a delivery vehicle was purchased in the quarter).

At the beginning of the quarter, the total in the “current assets” section of the balance sheet was 600,000, and at the end of the quarter – 400,000 rubles.

The company's profitability in the first quarter was as follows:

Average general fund: (3,000,000 + 3,400,000) / 2 = 3,200,000 rubles

Average OA is obtained: (600,000 + 400,000) / 2 = 500,000 rubles

The profitability of the enterprise for the first quarter will be: 350,000 / (3,200,000 + 500,000) * 100% = 9%

“Only 9%!”, the investor wanted to be surprised at such a small profitability, but then the financiers showed him that in the second quarter the profitability was 10, then 11%, while the absolute profit of the bakery either remained unchanged or tended to grow, that is, the company is confidently growing and developing, moreover, it has fixed assets and assets, which for an investor can act as an additional guarantee of investment.

It is clear that we took these numbers out of thin air and your indicators may be completely different. The main thing we wanted to do here is to show the formula by which you can calculate the profitability of an enterprise.

And from the numbers you can make independent calculations and conclusions for your company:

• if there is an increase in profitability over time, then your management of the company is commendable, the company is growing;
• if the profitability indicator decreases, then we urgently need to look for the reasons for this downward trend and correct the situation:
  • work with cost optimization,
  • increase the efficiency of sales departments and distribution channels,
  • clean up ineffective advertising costs and replace them with more effective ones,
  • fire ineffective staff, especially non-selling sales people, and so on.

We hope that the article was useful to you and your business. Subscribe to our newsletter, share us on social networks, share links with friends and partners.

We wish prosperity and development to your business.

Best regards, GK Dicaster.

Profit margin is a key indicator of financial analysis, which allows you to understand whether a business pays for itself and how effectively. You will need to calculate this indicator to draw up a high-quality business plan, monitor cost dynamics, adjust prices for products or services, as well as for a general assessment of the profitability of your company in the analyzed period. Earnings margin is usually expressed as a percentage, and the higher the percentage, the more profitable the business is.

Steps

Part 1

Understand the difference between gross profit, gross profit margin and net profit margin. Gross profit is the difference between revenue from the sale of goods or services and their cost. Its calculation does not take into account commercial, administrative and other expenses; only those costs that are directly related to the production of goods or the provision of services are taken into account. Gross profit margin is the ratio of gross profit to revenue.

Determine the billing period. To calculate profitability, the first step is to determine the period to be analyzed. Typically, the calculation takes comparable months, quarters or years and calculates the profitability for these periods.

• Think about why you need to calculate profitability? If you want to get a loan approved or attract investors, then interested people will need to analyze a longer period of time of your company's operation. However, if you want to compare profitability figures from month to month for your own needs, then it is quite acceptable to use shorter monthly time periods for calculations.

1. Calculate the total revenue received by your company in the analyzed period. Revenue is all of a company's income from the sale of goods or provision of services.

   • If you only sell goods, for example, you run a retail store, then your revenue for the analyzed period will be all sales realized minus discounts made and returns of goods. If you don’t have ready-made numbers at hand, then multiply the number of goods sold by their price and adjust the result for discounts made and returns made.
   • Similarly, if your company provides services, for example, repairing and sewing clothes, then your revenue will be all funds received for the provision of services in a specific period.
   • Finally, if you own an investment company, you should consider interest income and dividends received when calculating your income.

2. To calculate your net profit, subtract all your expenses from your revenue. Expenses are the opposite in nature of revenue. They represent the costs you had to incur during a period in connection with the production of goods or services and the use of certain facilities in your business. Your expenses will include not only the cost price, but also operating, investment and other types of expenses.

   Divide your net profit by your revenue. The result of the division, expressed as a percentage, will represent the net profit margin, namely, the percentage share of net profit in the company's revenue.

   • For the above example, the calculation would look like this: (300,000 ÷ 1,000,000) *100% = 30%
   • To further explain the meaning of the profitability indicator, we can use the example of a business selling paintings. Profitability in this case will talk about what share of the money received for the sale of paintings covers the costs and allows you to make a profit.

   Part 2

   Correct application of profit margin indicator

   1. Evaluate whether the ROI value is what your business needs. If you plan to live solely on the income from your business activity, analyze the profitability and sales volumes that can usually be realized in a year. You will definitely want to spend part of the profit received on reinvestment in the business, so calculate whether what is left from the profit will be enough for you to live your usual lifestyle?

      • For example, as mentioned above, the company's net profit amounted to 300,000 rubles out of 1,000,000 rubles in revenue. If 150,000 rubles are spent on reinvesting in the business, then you will only have 150,000 rubles left in your hands.

   2. Compare your company's profitability to that of other comparable companies. Another useful use of the profitability ratio is its use in comparative analysis of comparable companies. If you want to get a loan from a bank for your company, the bank employees will tell you what the profitability of your type of business, taking into account its size, must be in order to approve the loan. If you have a large enough company that has its own competitors, you can collect information about competitors and calculate their profitability to compare with yours.

      • For example, Company 1’s revenue is 5,000,000 rubles, and all expenses are 2,300,000 rubles, which gives a profitability of 54%.
      • Company 2 has revenues of 10,000,000 rubles and expenses of 5,800,000 rubles, so its profitability is 42%.
      • In this situation, Company 1's profitability is better, despite the fact that Company 2 receives twice as much revenue and has a higher net profit.

   3. When comparing profitability indicators, you should not “compare forks with bottles.” The profitability of companies varies greatly depending on their size and industry. To get the most benefit from benchmarking, it is best to compare two or more companies in the same industry that have approximately the same revenue.

   4. If necessary, try to improve your company's profitability ratio. Profitability can be changed by increasing revenue (for example, by raising prices or increasing sales) or reducing the cost of doing business. In addition, even if after taking actions to increase revenue and reduce costs, the profitability value does not change, you will receive an increase in net profit in ruble terms. However, as you experiment with raising prices or lowering costs, remember to consider the nature of your business, its risk tolerance, and competition.

      • It's usually necessary to make small changes before committing to larger ones to avoid bankrupting your business or causing customer dissatisfaction. Remember that increasing profitability comes at a price, and trying to increase profitability too aggressively can have the opposite effect on your business.
      • In addition, profitability should not be confused with trade margins. Trade margin is the difference between the selling price of a product and its cost.

Profitability - formula Its calculation is, in general, simple. After reading our article, you will be convinced of this. In it we will not only give profitability formula, but we will also talk about the nuances of calculation and the purpose of this indicator.

Profitability is the goal of calculation

The ultimate goal of any commercial company is profit, that is, the positive difference between the income received and the expenses incurred. Profit is an absolute financial indicator. Having calculated it, we can see that over a certain period our income covered our expenses. However, it still does not allow assessing the effectiveness of activities.

For example, let’s take 2 companies in the same industry - one is large, with high turnover, the other is small. Let's assume that both companies made a profit for the year. For a large enterprise, the profit in absolute terms can significantly exceed the financial result obtained by a small one. However, this does not mean that it works more efficiently. After all, large profits can be achieved due to the scale of activity, and not due to competent business management, that is, due to quantity, not quality. And this is far from the best option.

Meanwhile, we cannot assess the activities of such different companies simply on the basis of profit information, since the indicators are not comparable. And this is where profitability comes to our aid.

Enterprise profitability: calculation formula

Profitability is a relative indicator of profitability, the ratio of profit to the indicator from which you want to know the return. If we explain it in layman's terms, then profitability shows us how much profit each ruble invested in and spent by the organization brings to the organization.

In general terms for profitability calculation formula looks like this:

R = P / X * 100%,

R - profitability;

P - profit;

X is the indicator whose profitability we consider.

Profitability is expressed as a percentage, so the division result must be multiplied by 100.

Types of profitability

The calculation of profitability is multifaceted. You can calculate the profitability of almost everything: any resources, sources of their acquisition, costs. We will focus on calculating the main types of profitability. They are as follows:

1. Return on assets.

This type of profitability is designed to show how much profit each ruble that the company has invested in the property returns. To calculate it, profit is correlated with assets. Enterprise profitability formula in this area it will be:

R act = P r / A k * 100%,

R act - return on assets;

P r - profit (as a rule, they take either net profit or profit from sales, depending on the purpose of the calculation);

And k is the average value of the organization’s assets for the billing period.

Just like return on sales, return on assets has a granularity. You can calculate the profitability of total, non-current or current assets. If necessary, you can even determine the profitability of individual types of property, for example, fixed assets.

You can learn about the features of calculating return on assets from the article .

1. Return on capital.

For example, return on equity may be of interest to company owners. It provides information about whether an investment is performing effectively.

View profitability formulas here it will be like this:

R sk = P r / S K * 100,

R ск — return on equity;

P r - net profit (return on equity is calculated only based on net profit);

C K is the average amount of equity capital for the billing period.

For more information about this, see the article .

R zk = P r / (D O + K O) * 100,

R зк — return on equity;

P r - net profit;

D O - long-term liabilities;

K O - short-term liabilities of the organization.

This indicator will show the profitability for each ruble of borrowing.

1. Return on sales or overall profitability.

This is the ratio of profit to sales volume, which shows how many kopecks of profit “sit” in each ruble of revenue. Profitability formula sales is as follows:

R prod = P r / O p * 100%,

R prod—return on sales;

P r - profit;

O n - sales volume (revenue).

Everyone knows that profit is also divided into types (gross, operating, net, etc.). For sales profitability, you can use each of them depending on what you need to learn.

Read more about the nuances of calculating profitability of sales in the article .

1. Product profitability.

This is also a very important indicator of profitability, which indicates cost efficiency and shows the share of profit in each ruble spent on production. Formula for calculating profitability in this case, it is the ratio of profit to cost:

R pr = P r / S s * 100,

R pr - product profitability;

P r - profit;

С с — cost price.

Taking into account the purposes of the analysis, this product profitability is calculated:

• by net profit or profit from sales;
• at the full cost of production or only at production cost.

Read more about the calculation in the article .

Profitability of “tax” value - is this possible?

So, we found out that profitability can be used to judge the effectiveness of a company. This implies a circle of people to whom this indicator may be useful. Obviously these include:

• company owners who need to know how their money works;
• managers, because they are responsible for the work of the company, including to the owners;
• potential investors - you should understand where you are investing;
• analysts, economists, financiers - they work with numbers, make forecasts, look for growth reserves, and fight the inefficient use of resources.

At first glance, that's all. Meanwhile, tax specialists should also be included in the circle of interested parties. Yes, yes, the inspection is also interested in your profitability, namely the profitability indicators of products and assets. They track average profitability by industry - data from 2006 to 2014 can be found in Appendix No. 4 to Order No. MM-3-06/333@ of the Federal Tax Service of Russia dated May 30, 2007 (information is supplemented annually). And compare your profitability with them. A deviation of more than 10% may be a signal for the company to be included in the on-site audit plan (see 11th of the publicly available criteria for taxpayers’ self-assessment of tax audit risks). This means that employees of accounting and tax services of organizations should also pay attention to profitability.

Where can I get data to calculate the profitability of an enterprise?

We know that in order to calculate the profitability of an activity, the formula must contain information about the profit, revenue, assets, capital and borrowings of the enterprise. All this information can be gleaned from financial statements: the balance sheet and income statement.

For more information on the balance sheet, see the article , and about form 2 - in the article .

But on their basis, only fairly aggregated, general indicators can be calculated. A more detailed and in-depth analysis requires more detailed information. For example, to calculate the profitability of a particular type of product, we need figures for the profit and cost of a specific product; the profitability of sales can be calculated not for the organization as a whole, but for the type of activity, and for this we need to know the amount of revenue and profit specifically for the line of business that interests us. Which means, to calculate profitability of the enterprise, formula should be supplemented with data from accounting analytics or management accounting.

Results

Unprofitable means unprofitable. Everyone knows this. But not everyone knows what exactly profitability can mean. Using the data we provided profitability formulas, you can easily calculate its level in the organization and find out whether your company is effective or not. And we strongly recommend that accountants pay attention to the profitability of products and assets. What if this saves you from unnecessary attention from the tax authorities?

The ultimate goal of any enterprise can be considered profit, which is the positive difference between the income received and the expenses incurred.

Profit is an absolute financial indicator, by calculating which an entrepreneur can conclude that for a certain period his income covered his expenses. However, this indicator does not make it possible to assess the effectiveness of activities. In this case, the overall profitability formula comes to the rescue.

DEFINITION

Profitability is a relative indicator reflecting profitability. The formula for overall profitability is calculated by calculating the ratio of profit to the indicator from which it is necessary to know the return.

Simply put, profitability shows how much profit is in each ruble spent by an enterprise.

The formula for total profitability in its simplest form is as follows:

P = P / x * 100%,

Here P is the profitability indicator;

P - amount of profit;

x is the indicator for which profitability needs to be calculated.

The profitability indicator is expressed as a percentage, so the result from the quotient is multiplied by 100%.

Types of profitability

Calculating different types of profitability has many aspects. It is possible to calculate the profitability of any indicator, from resources to sources of their acquisition and costs.

There are several types of profitability, let's consider the main ones:

• Return on assets which is designed to show the amount of profit that is returned by each ruble invested in the company’s property. To calculate this type of profitability, profit must be correlated with assets.

Total profitability formula for calculating assets:

Rakt = P/SA * 100%

Here Rakt is an indicator of return on assets;

P - the amount of profit (the profit for calculation can be either net or profit from sales, which depends on the calculation goals);

SA is the average value of the enterprise's assets for the billing period.

• Return on capital.

When calculating, for example, return on equity, you can find out how effectively investments are working. The general profitability formula for the total determination of profitability for all capital looks like this:

Rcap = P/C * 100%,

Here Rcap is an indicator of return on capital;

P - net profit (this type of profitability is calculated exclusively in accordance with net profit);

K is the average amount of capital in the billing period.

Privately calculated return on debt capital:

Rzk = P / (DO + KO) * 100%,

Here Rzk is an indicator of return on debt capital,

P - the amount of net profit;

DO - the amount of long-term liabilities;

KO - the amount of short-term liabilities.

This indicator reflects the profitability of each ruble of borrowing.

• Sales profitability.

The formula for overall return on sales is calculated by taking profit divided by sales volume. This formula shows how much profit is in each ruble of revenue.

The return on sales formula is as follows:

Rprod = P / OP * 100%,

Here Rprod is return on sales;

P - amount of profit;

OP - sales volume (revenue).

To calculate return on sales, any profit can be used, depending on what information users need (gross, operating, net, etc.).

• Product profitability which is the most important indicator of profitability, showing cost efficiency and the share of profit in each ruble spent on production. The formula for calculating product profitability is the ratio of profit to product cost.

Examples of problem solving

EXAMPLE 1

Exercise

The Stalresurs enterprise has the following performance indicators for the 2016 period: The amount of profit is 1,283,000 rubles. Sales volume (revenue) – 180,000 rubles. Determine the return on equity of the enterprise.

Solution

The general profitability formula is as follows: Profitability- a relative indicator of economic efficiency. Profitability comprehensively reflects not only the degree of efficiency in the use of material, labor and financial resources, but also the use of natural resources. The profitability ratio is calculated as the ratio of profit to the assets, resources or flows that form it. It can be expressed both in profit per unit of invested funds, and in the profit carried by each monetary unit received. Let's consider the main indicators characterizing the profitability of an organization: Profitability is the resulting indicator of the performance of any company, in general terms profitability ratios are calculated using the formula: R = Profit (net, book) / production indicator Overall profitability is a general indicator of the economic efficiency of an enterprise, industry, economy, equal to the ratio of the gross (balance sheet) profit received over a certain period of time (usually a year) to the average cost of fixed assets and the standard share of working capital for this period. Total profitability ratio The main and most common indicator assessing the profitability of an enterprise is the overall profitability ratio. This indicator is defined as the ratio of profit before tax to revenue from sales of goods, works and services produced by the enterprise: K OR = profit (loss) before tax / revenue x 100% K OR = page 140 / page 010 f.2 * 100% K OR = page 2300 / page 2110 * 100% Return on sales ratio The coefficient allows you to determine how much profit the company has from each ruble of revenue from the sale of goods, work or services. This indicator is calculated both as a whole and for individual product items. K RP = profit (loss) from sales / revenue (net) from sales x 100% K RP = page 050 / page 010 f. №2 * 100% K RP = page 2200 / page 2110 * 100% Return on assets ratio Indicators of profitability of assets or its parts allow us to judge the effectiveness of investments in a particular activity. In general, the formula for calculating the return on assets ratio is: K RK = net profit (loss) / capital * 100% K RK = gross profit / capital * 100% The choice of formula used depends on the goals set and the subject of analysis. Those. balance sheet formula, for example, to determine return on total capital ratio(to KAP) will look like: K KAP = line 029 or 050 or 140 or 190 f. No. 2 / [(line 300n.g. + line.300k.g.)/2] x 100% K KAP = line 2100 or 2200 or 2300 or 2400 / [(line 1600 N.G. + line 1600 K.G.)/2] x 100% Return on net assets ratio: KNA = profit / net assets x 100%. Return on current assets ratio: TO TA = profit / current assets (or working capital) x 100%. Return on assets ratio: K A = profit / average annual balance sheet currency x 100%. Return on equity ratio: K SK = profit / equity x 100%. Profitability ratio of production assets: KPF = profit / average value of production assets x 100%. Production profitability ratio Production profitability allows you to evaluate the efficiency of producing goods, providing services or performing work. The indicator allows you to determine how much profit the company receives from each ruble of costs incurred. To РЗ = balance sheet profit (loss) / cost x 100% To RZ = page 050 / page 020 f. №2 * 100% K RZ = page 2200 / page 2120 * 100% The calculation of profitability indicators in accordance with international standards can be found in this article. To make informed conclusions based on the results of calculating profitability ratios, it is also necessary to take into account the following: Time aspect - profitability ratios are static, reflect the performance of a particular reporting period and do not take into account the long-term return on long-term investments, therefore, when switching to new technologies, their values ​​may deteriorate. In such cases, it is necessary to evaluate profitability indicators over time./p> Incomparability of calculations - the numerator and denominator of profitability are expressed in “unequal” monetary units. Profit reflects current results, and the amount of capital (assets) accumulated over several years is book (accounting) and does not coincide with the current estimate. Therefore, to make decisions, it is also necessary to take into account indicators of the company’s market value. The problem of risk is that high profitability can be achieved at the cost of risky actions, therefore, in parallel, for a full analysis of the company’s performance, the structure of current costs, financial stability ratios, operating and financial leverage are analyzed. 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