What is profitability in simple words? Analysis of enterprise profitability indicators

Business, whatever it is, requires costs. An entrepreneur, investing in a new project, expects a return in the form of high profits and its constant growth. To assess the investment efficiency indicator, business profitability is calculated. We will tell you in the article what it gives and how it is determined.

Each entrepreneur determines the need to calculate profitability for himself. Large companies employ an economist, whose responsibilities include regular calculations of operational efficiency and planning of further work taking into account the obtained values. In addition to total profitability, for this purpose, the net return on assets, return on fixed assets, investments, sales, personnel, equity and other ratios are calculated.

How is profitability determined?

Calculating the profitability of a business is not so difficult if you have ready-made financial statements at hand. Individual entrepreneurs who do not keep accounting records or are just planning to open their own business will have to bring everything together “by eye.” Profitability is calculated mainly as a percentage. The calculation formula is as follows:

Profitability of production = (Profit on balance / Costs of production and sales) x 100

This calculation will allow you to determine how much profit before taxes falls on 1 ruble of funds spent. For convenience, you can find a convenient online calculator online or download a special program. On average, the normal ratio is 15-35%, but highly depends on the specifics of the commercial activity. For retail trade, 10-15% is a decent result, but for the beauty or construction industry this figure will be small. For these areas you need to start from 50-100%, for legal services, trading in intangible assets - from 100%.

The above calculation shows the nominal value of profitability. There is also real profitability - the one that is determined taking into account inflation. To assess the purchasing power of an enterprise. When the indicator turns out to be low or even negative, this indicates a lack of operational efficiency and impending bankruptcy. A business with high profitability is considered promising, fully receiving a return on investment.

Factors influencing the level of profitability

Since profitability is a relative indicator, its value largely depends on internal changes in the company and external market conditions. The main ones:

Labor productivity.
Technical issues in production.
Fluctuating prices for resources purchased by the enterprise, materials, third-party services, and labor.
Changes in the assortment and prices of products sold due to changing demand and crisis.
Seasonality, temporary equipment downtime or product defects.

The level of profitability can be increased by accelerating trade turnover, reducing costs, and rationally increasing prices. In any case, to stabilize the situation, a number of other economic indicators and points should be calculated and taken into account: labor productivity, product quality, the situation with competitors.

Example of profitability calculation

For better understanding, let us show a simple example of calculating the level of profitability using the above formula.

Initial data:

Total expenses (purchase of raw materials, wages, rent, materials for work, fuels and lubricants, etc.) – 18 million rubles.
Total income (revenue) – 22 million rubles.

First, let's calculate the profit: income - expenses = 4 million rubles.

Profitability = (4 million rubles/18 million rubles) x 100 = 22.2%

Calculations can be made per month, year, quarter. For convenience, profitability for each type of product or production department is often calculated separately.

It is important to compare indicators over time and take measures to improve them. Return on capital, personnel, assets and other things is also calculated separately. Economic analysis must be taken seriously. This is an opportunity to find out the company's weaknesses and improve its overall profitability.

An important role in the system of financial and economic indicators of an enterprise belongs to the indicator “ profitability". Profitability is relative an indicator that characterizes the efficiency of an enterprise. Profitability reflects the level of profit relative to a certain base. Profitability expresses the return per unit of investment, cost or turnover. It can be represented as percentages or coefficients.

Profitability evaluates the efficiency of the most important factors of production. The following types of profitability are distinguished:

profitability of sales;

cost effectiveness;

return on assets;

return on fixed capital;

return on working capital;

return on equity;

return on debt capital.

When calculating profitability indicators, profit indicators are used. Let's take a closer look at each profitability indicator.

Return on sales. This indicator can also be called profitability of revenue, profitability of turnover.

Return on sales is determined by the formula:

Where
- profit from sales for the period;

- sales revenue for the period.

Return on sales characterizes the ratio of profit from sales to revenue, expressed as a percentage. Return on sales shows how much profit from sales is contained in one ruble of revenue. The higher the return on sales, the better. For example, if the return on sales is 20%, this means that one ruble of revenue contains 20 kopecks of profit from sales.

Return on sales is an estimated indicator of the production and economic activity of an economic entity - an enterprise. It reflects the level of demand for products, works and services, that is, how correctly the economic entity has correctly defined the product range and product strategy.

If an enterprise produces several types of products or goods, then it is possible to calculate the profitability of sales for individual types of products. Based on the calculated indicators of profitability of sales by type of product, the most profitable products for the enterprise can be identified.

Cost return. This indicator can also be called product profitability.

Cost profitability is determined by the formula:

(10)

Where
- profit from sales for the period,

- total cost for the period.

Cost profitability characterizes how much profit from sales an enterprise receives from one ruble of total cost. For example, if the cost return is 15%, then 15 kopecks of profit from sales falls on one ruble of costs.

Cost profitability can be calculated both for the enterprise as a whole for the period, and for individual products, types of products, and services. This allows the company to determine the most profitable product, product, service. Other profitability indicators are calculated for the enterprise as a whole.

The following three profitability indicators characterize the efficiency of using the enterprise's property: return on assets, return on fixed capital, return on working capital.

Return on assets. This profitability indicator characterizes the efficiency of using the total assets of the enterprise. The assets of an enterprise include non-current and current assets.

Return on assets is determined by the formula:

(11)

Where

- the average value of the enterprise's assets for the period.

The average value of the enterprise's assets for the period is determined by the formula:

(12)

Where
- the value of the enterprise’s assets at the beginning of the period;

- the value of the enterprise's assets at the end of the period.

Return on assets characterizes how many units of profit are received per unit of asset value, regardless of the source of funds. Return on assets shows how much profit before tax (balance sheet profit) an enterprise receives from one ruble invested in the assets of the enterprise. If the return on assets is 25%, this means that every ruble invested in the assets of the enterprise brings 25 kopecks of profit before tax. The higher the return on assets, the more efficiently the company uses its assets.

Return on fixed capital (return on non-current assets). This profitability indicator characterizes the efficiency of using the enterprise's fixed capital. Fixed capital is the non-current assets of the enterprise.

Return on fixed capital is determined by the formula:

(13)

Where
- profit before tax (balance sheet profit) for the period;

- the average cost of the enterprise's fixed capital for the period.

The average cost of the enterprise's fixed capital for the period is determined by the formula:

(14)

Where
- the cost of the enterprise's fixed capital at the beginning of the period;

- the value of the enterprise's fixed capital at the end of the period.

Return on fixed capital characterizes how much profit before tax (balance sheet profit) an enterprise receives from one ruble invested in non-current assets. If the return on fixed capital is 30%, this means that every ruble invested in the non-current assets of the enterprise brings 30 kopecks of profit before tax.

Return on working capital. This profitability indicator characterizes the efficiency of using the working capital of the enterprise.

Return on working capital is determined by the formula:

(15)

Where
- profit before tax (balance sheet profit) for the period;

- the average cost of working capital of the enterprise for the period.

The average cost of working capital of an enterprise for the period is determined by the formula:

(16)

Where
- the cost of working capital of the enterprise at the beginning of the period;

- the cost of working capital of the enterprise at the end of the period.

Return on working capital characterizes how much profit before tax an enterprise receives from one ruble invested in current assets. If the return on working capital is 17%, this means that every ruble invested in the working capital of the enterprise brings 17 kopecks of profit before tax.

Let's consider the return on equity and debt capital.

Return on equity and debt capital characterize the efficiency of using capital invested in an enterprise.

Return on equity. This indicator characterizes the efficiency of using own funds, which shows the amount of net profit per one ruble of own funds. Company owners, first of all, are not interested in the absolute value of net profit, but in the amount of profit that falls on one ruble of their own funds.

The return on equity capital of an enterprise is determined by the formula:

(17)

Where

- the average amount of equity capital for the period.

The average cost of equity for the period is determined by the formula:

(18)

Where
- the amount of equity at the beginning of the period;

- the amount of equity capital at the end of the period.

Return on equity shows how much net profit shareholders and owners of an enterprise receive from one ruble of their own funds. For example, if the return on equity is 70%, this means that every ruble invested by the owner in the business brings 70 kopecks of net profit.

The return on equity of an enterprise is taken into account to make decisions about investing funds. The higher this indicator, the more profit per share, the higher the potential dividends.

Return on debt capital. This indicator characterizes the efficiency of use of borrowed capital invested in the activities of the enterprise. Borrowed capital includes long-term and short-term liabilities.

Return on debt capital is determined by the formula:

(19)

Where
- net profit of the enterprise for the period;

- the average amount of borrowed capital for the period.

The average cost of borrowed capital of an enterprise is determined by the formula:

(20)

Where
- the amount of borrowed capital at the beginning of the period;

- the amount of borrowed capital at the end of the period.

Return on borrowed capital shows the amount of net profit from one ruble of borrowed funds invested in the activities of the enterprise. For example, if the return on debt capital is 50%, then each ruble of borrowed funds brings 50 kopecks of net profit.

In table () we present the main profitability indicators.

Key profitability indicators

Index	Units
Return on sales	% or rub./rub.	shows how much profit from sales is contained in one ruble of revenue
Cost return	% or rub./rub.	shows how much profit from sales the enterprise receives from one ruble of total cost
Return on assets	% or rub./rub.	shows how much pre-tax profit an enterprise receives from one ruble invested in the assets of the enterprise
Return on fixed capital	% or rub./rub.	shows how much pre-tax profit an enterprise receives from one ruble invested in non-current assets
Return on working capital	% or rub./rub.	shows how much pre-tax profit an enterprise receives from one ruble invested in current assets
Return on equity	% or rub./rub.	shows how much net profit shareholders and owners of the enterprise receive from one ruble of their own funds
Return on debt capital	% or rub./rub.	shows the amount of net profit from one ruble of borrowed funds invested in the activities of the enterprise

Let's consider an example of calculating profitability indicators.

Example. There is an aggregated balance sheet and profit and loss statement for the enterprise XXX LLC.

Aggregated balance sheet as of December 31. 2011 enterprise LLC "ХХХ", thousand rubles.

	As of 01.01. 2011	As of 12/31. 2011		As of 01.01. 2011	As of 12/31. 2011
I. Non-current assets			III. Capital and reserves
II. Current assets			IV. long term duties
II. Current assets			V. Current liabilities

Profit and loss statement for 2011 of the enterprise XXX LLC, thousand rubles.

Indicator name	For 2011

Cost of sales
Gross profit
Business expenses
Administrative expenses
Profit (loss) from sales
Other income
Other expenses
Profit (loss) before tax (BP)
Current income tax
Net income (loss)	132281,6

Let's calculate each profitability indicator separately.

Let's determine the profitability of the company's sales:

If the return on sales is 22%, then 22 kopecks of profit from sales is contained in one ruble of revenue.

Let's determine the profitability of the enterprise's costs.

If the return on costs is 28%, then 28 kopecks of profit from sales falls on one ruble of costs.

To calculate return on assets, it is necessary to calculate the average value of the enterprise’s assets for 2011:

Return on assets for 2011 is determined by the formula:

If the return on assets is 26%, then each ruble invested in the assets of the enterprise brings 26 kopecks of profit before tax.

Let's determine the return on fixed capital. To do this, we first calculate the average cost of the enterprise's fixed capital for 2011 as the average value for Section I of the balance sheet (Non-current assets):

Return on fixed capital (return on non-current assets) is calculated using the formula:

With the obtained value of return on fixed capital, each ruble invested in the non-current assets of the enterprise brings one ruble 98 kopecks of profit before tax.

Let's calculate the return on working capital. We define the average cost of working capital of an enterprise for 2011 as the average value for Section II of the balance sheet (Current assets):

Based on the calculated average working capital and the balance sheet profit (profit before tax), we calculate the return on working capital:

If the return on working capital is 30%, then the enterprise receives 30 kopecks of profit before tax for each ruble invested in the enterprise's current assets.

The average cost of equity for 2011 is calculated as the average value for Section III of the balance sheet (Capital and reserves) for 2011:

The return on equity capital of the enterprise for 2011 is determined by the formula:

Return on equity equal to 28% means that one ruble of equity invested in the activities of the enterprise brings 28 kopecks of net profit.

Let's consider the calculation of the return on debt capital indicator. Let's calculate the average cost of borrowed capital of an enterprise for 2011 as the average value for section IV (Long-term liabilities) and section V (Short-term liabilities) of the balance sheet:

Let's determine the return on debt capital for 2011:

The calculated return on borrowed capital shows that one ruble of borrowed funds brings the company 85.5 kopecks of net profit.

Based on the calculations made, we will draw up a table that will reflect the obtained values of profitability indicators for the enterprise XXX LLC.

Profitability indicators of the enterprise XXX LLC for 2011

These tables allow us to conclude that all profitability indicators of the enterprise XXX LLC are positive and have fairly high values, thus, the enterprise’s activities for 2011 can be considered effective. The company has the opportunity to compare the profitability indicators of the period under review with the profitability indicators of previous years. If you calculate the profitability indicators of a given enterprise for 2009 and 2010, you can identify the dynamics of changes in indicators. This will allow the enterprise to make appropriate management decisions to change the situation.

Profitability is a relative financial and economic indicator that has the property of comparability, therefore, it can also be used when comparing different business entities. However, you can compare enterprises engaged in the same type of activity, that is, enterprises that are competitors. In this regard, a certain difficulty arises in obtaining information about the performance of competing enterprises. Therefore, industry averages are also used as a basis for comparison. Statistical information contains data on indicators of return on sales (return on turnover) and return on assets. Each enterprise has the opportunity to compare its indicators with industry average profitability indicators. The table shows the dynamics of the indicator return on assets for the period from 2003 to 2011.

Return on assets of organizations by type of activity 1

Index
Total in the economy
Agriculture, hunting and forestry
Fishing, fish farming
Mining
Manufacturing industries
Production and distribution of electricity, gas and water
Construction
Wholesale and retail trade
Hotels and restaurants
Transport and communications
Financial activities
Real estate transactions, rental and provision of services
Public administration and military security; social fear.
Education
Health and social service provision
Provision of other utility and personal services

Comparison of the industry average and the actual profitability indicator, calculated on the basis of enterprise data, allows you to understand whether the enterprise is below or above the industry average; if lower, then this is a “signal” for the enterprise about the need to make appropriate management decisions.

PRACTICAL TASKS ON TOPIC 1

EXERCISE 1. The company produces and sells homogeneous products. 10,000 units were sold within a year. at a price of 450 rubles. for a unit. The cost of products sold is RUB 2,000,000. Costs associated with the sale of products amounted to 800 thousand rubles. Other income of the enterprise - 800,000 rubles. Other expenses of the enterprise - 900,000 rubles. Return on assets – 25%. Current assets make up 40% of the total value of the enterprise's assets. Determine: return on sales, return on costs, return on fixed capital, return on working capital.

EXERCISE 1. The company produces and sells homogeneous products. During the year, 12,000 units were sold. at a price of 1000 rubles. for a unit. The cost of products sold is RUB 6,000,000. Costs associated with the sale of products amounted to RUB 2,000,000. Other income of the enterprise - 1,000,000 rubles. Other expenses of the enterprise - 1,500,000 rubles. Income tax – 20%. Return on equity – 10%. Balance currency - 50,000,000 rubles. Determine: return on sales, return on costs, return on debt capital.

The most important goal of any commercial activity is the most productive use of funds and resources initially invested in the business or attracted during the work process. It is obvious that businessmen and investors are primarily interested in enterprises that receive more profit in proportion to the capital employed: in order to present this quality in understandable numerical terms, it is necessary to calculate profitability.

In simple words, profitability is a conditional criterion that helps determine the effectiveness of managing the resources invested in an enterprise, the return on costs associated with the manufacture and sale of products. Calculating profitability seems to be one of the main operations preceding investing in a particular company, modernizing production, improving staff qualifications and other measures that increase the costs of business owners.

What is profitability?

Analysts consider profitability indicators as parameters that allow them to assess the performance of business activities with a certain degree of reliability. In simple words, profitability is a formula that visually represents the productivity of using such enterprise resources in business as:

Material and technical base;
Possibilities of the workforce;
Organization of supplies of raw materials;
Organization of sales channels;
Enterprise financial management;
Other material and intangible resources.

Comparing profits, sales volumes and other physical indicators for companies with different sizes or specializations is somewhat incorrect: a small enterprise in some situations can be much more efficient than a giant concern with billions in turnover. Using profitability indicators, this comparison becomes more fair, since such coefficients are calculated in relative terms.

In simple terms, profitability is an example that symbolizes the return on business and demonstrates the amount of income generated for every ruble invested in a business. From an economic point of view, here you can see well-known analogies with efficiency: in the general case, the indicator is calculated as the ratio of the amount of profit to the sum of all production and non-production costs for a specified period of time. Accordingly, profitability is the proportion between a company's income and expenses.

The formula used to calculate the coefficient is quite primitive, but the obtained values cannot be assessed in absolute terms. Here it is necessary to analyze the dynamics, comparing performance indicators for different periods, different external and internal conditions. Sometimes an initially promising business turns into an unprofitable one precisely due to the incorrect use of calculated values to determine critical production and sales volumes.

Why do you need to determine profitability?

Profitability should be considered one of the key indicators used to analyze the activities of an enterprise and determine the productivity of the capital invested in the business. For clarity, it is calculated as a percentage: the higher the coefficient value, the higher the profitability.

In what situations can this indicator be useful:

Drawing up a business plan. Thanks to the calculation of profitability, it is possible to draw conclusions about the quality of elaboration of all the details of the business plan and the feasibility of implementing this project;
Pricing. Using profitability indicators, businessmen determine the acceptable reduction in product prices, with the goal of conquering the market or gaining competitive advantages;
Management. By analyzing the profitability indicators of an enterprise at different time intervals, it is possible to identify problems in the organization of business processes;
Income forecasting. Knowing the average profitability allows the manager to fairly accurately predict the profit of future periods;
Justification of the need for investment. Taking into account the amount of investment and the average profitability of a small business, investors determine the effectiveness and feasibility of the investment;
Determination of enterprise value. The level of profitability, combined with liquidity, determines the company's value when selling a business.

In addition, it is necessary to calculate business profitability indicators to conduct a comparative analysis with the efficiency of competitors, when attracting debt financing, before implementing any projects or mastering the production of a new type of product.

Types of profitability

A businessman who wants to get an adequate idea of the current state of the enterprise must use several different profitability indicators. Thanks to their analysis, it is possible to comprehensively consider the situation, identify problem areas or business processes, and evaluate the effectiveness of using all available resources.

The following coefficients are most often calculated:

Sales profitability;
Profitability of production;
Profitability of certain types of products;
Return on assets of the enterprise;
Return on investment;
Return on equity;
Profitability of fixed assets;
Personnel profitability.

To obtain these indicators, you do not need to carry out special activities or research - all source data can be found in ordinary accounting documents. When calculating the profitability of a newly created business, statistics for a given market segment and reports published by competitors in the public domain are used.

Return on Sales (ROS)

Return on sales is the ratio of income received from the sale of all goods or services to the company's total revenue. In this way, you can determine the share of profit that falls on each ruble earned by an entrepreneur.

This coefficient is used in the pricing process and in assessing the total costs of the enterprise. However, to get an idea of a company's performance, it is necessary to compare ROS with those of organizations operating in the same industry and producing similar products. You can calculate the profitability of a business in sales in the following way:

ROS = (profit before tax / sales revenue) x 100%.

Sometimes, for a more accurate analysis, calculations use the amount of net profit, which is the final income of the enterprise minus all costs, as well as tax and loan payments.

Production profitability

Profitability of production is the ratio of the amount of profit (gross or net) to the total amount of costs associated with the manufacture of products. By calculating this coefficient, you can estimate the share of income that the enterprise receives for each ruble spent and determine the efficiency of capital use.

Production profitability is calculated both for the company as a whole and for its individual divisions. This is how they determine the feasibility of conducting activities in one direction or another, especially if the enterprise operates simultaneously in several areas. Calculating the profitability of a manufacturing business looks like this:

RP = (profit / (cost of fixed assets + amount of working capital)) x 100%.

Return on Product (ROM)

This coefficient is defined as the ratio of income received from the sale of products to the total costs of its production and sale. This way you can estimate the share of profit that falls on each ruble invested in the cost of the product. ROM is a fairly flexible indicator that allows you to justify the feasibility of producing both the entire range of goods and individual groups, as well as specific types of products. How to determine the profitability of a particular type of product:

ROM = (profit from product sales / product cost) x 100%.

Return on assets (ROA)

This indicator clearly demonstrates the productivity of using the company’s assets to generate profit, the effectiveness of the strategy for managing the assets owned by the enterprise, and the return on investment of a business that uses its own resources. When calculating ROA, it is necessary to take into account all current and non-current assets available to the organization or attracted by it in the process of conducting business. The formula for calculating business profitability in terms of the efficiency of using enterprise resources looks like this: ROA = (net profit / average asset value for the period) x 100%.

By regularly calculating this ratio, you can identify a non-profit-making asset and make a decision on its sale, modernization or lease.

Return on Investment (ROI)

Return on investment is the ratio of the income received during the investment process to the amount of initially invested capital. In this way, you can quite accurately determine the profit that each ruble invested in the enterprise brings. How to calculate business profitability in terms of the efficiency of using attracted investments:

ROI = (net profit + (asset sale price - asset purchase price) / asset purchase price) x 100%.

If, due to the incompleteness of the project, the final price of the asset is unknown, then when calculating, you need to take an indicator equal to its value at the beginning of the investment. An ROI greater than zero indicates the appropriateness of capital allocation, while negative values indicate impending losses.

Return on equity (ROE)

The ROE ratio is defined as the ratio of a company's net profit to its equity capital. This indicator helps investors evaluate the productivity of using the company's funds and the correctness of the strategy for managing its resources. How to calculate business profitability in terms of efficiency in attracting equity capital:

ROE = (net profit for the year / equity) x 100%.

When deciding on debt financing for an organization, this ratio must be compared with the rate on a bank loan. If ROE is higher, then lending can be considered appropriate and economically justified. Otherwise, in order to avoid losses, it is better to refuse to raise funds.

Return on fixed assets (ROFA)

Calculation of the profitability ratio of fixed assets is aimed at assessing the productivity of their use in the economic activity of the enterprise. Fixed assets are considered to be all objects directly or indirectly involved in the manufacturing process of products that do not change their original form. In other words, these include:

Industrial and warehouse buildings and structures;
Machine tools, equipment and units;
Trucks and loading equipment;
Passenger cars and vehicles for transporting passengers;
Office furniture and office equipment;
Expensive devices and tools.

ROFA = (net profit / cost of fixed assets) x 100%.

Return on Personnel (ROL)

Personnel profitability is the ratio of net profit received for a certain period to the total number of employees working at the enterprise at that time. In this way, the optimal staffing of the organization is determined, allowing it to obtain maximum income at minimum costs.

This business profitability indicator can be calculated as follows:

ROL = (net profit / number of employees in the enterprise).

Along with this indicator, economists often calculate other, more informative profitability ratios:

The ratio of employee maintenance costs to company profits;
The ratio of the costs of maintaining any division or branch to the profit received by them;
The personal profitability of an employee is the ratio of expenses associated with him to the income brought by the specialist to the enterprise budget.

Thus, ROL allows you to achieve the highest productivity by identifying departments and branches that need to be reduced or expanded.

Break-even point calculation

Explaining in simple words what the profitability of an enterprise is, one cannot fail to mention such an important parameter for business as the break-even point. It indicates the minimum volume of sales that is necessary to cover all costs associated with the production and marketing of products. In other words, the coefficient helps a businessman calculate the level of sales at which the enterprise will operate “at zero”, without profit, but also without losses.

The break-even point in some sources is called the profitability threshold, or break-even point (BEP). To determine the lower limit of sales volume, after overcoming which the business will begin to generate income, use the following formula:

BEP = (fixed costs) x (revenue) / (revenue) – (variable costs).

Thus, the profitability threshold is directly affected by the cost of a unit of goods, as well as fixed and variable costs at all stages of manufacturing and marketing of products. When these parameters change, the value of the coefficient immediately changes: in particular, an increase in BEP indicates problems in the process of making a profit or indicates an increase in production costs.

In addition, calculating the break-even point allows you to:

Assess the safety margin of the business;
Identify problems with the organization of business processes;
Determine the feasibility of investing in a project that is expected to pay off only in the next period;
Calculate prices when sales volume increases or decreases;
Determine the acceptable threshold for reducing revenue without the risk of losses.

Factors Affecting Profitability

Obviously, any entrepreneur is interested in creating a business with high profitability. However, simply calculating the main coefficients is not enough to solve this problem, since the value of each indicator is influenced by many external and internal factors.

The first include:

Geographical location. Regional characteristics have a significant impact on the pricing policy of the enterprise, and its distance from suppliers and consumers determines the volume of transport and storage costs;
Level of competition. The markup on products and the profit of the enterprise depend on the activity of competitors and the need to combat dumping;
Market conditions. To a certain extent, the cost of a product is determined by the general state of affairs in the industry, the purchasing power of customers and the general level of demand for a given type of product;
Tax policy. Obviously, the amount of tax deductions directly affects the company's net profit;
Political situation. Due to the influence of political factors, prices for imported raw materials change, foreign markets open or close;
Tariffs of counterparties. The amount of overhead costs depends on the cost of services provided to the enterprise by contractors;
Prices of raw material suppliers. Also, the cost of a product is determined by the prices of suppliers of raw materials and materials necessary for its production.

Among the internal factors that determine the profitability of business in Russia, a distinction is made between production and non-production.

The non-production category primarily includes:

Logistics efficiency. The entrepreneur's expenses depend on the correctness and efficiency of organizing the processes for delivering raw materials and finished products;
Marketing effectiveness. The cost of attracting one client depends on the method of advertising and the quality of advertising materials;
Environmental protection measures. The company's expenses may increase if it is necessary to take measures to neutralize or prevent the impact of production on the environment;
Working conditions. By providing employees with the necessary infrastructure, labor productivity increases, which leads to a reduction in costs;
Financial policy of the enterprise. The company's profit partly depends on the size of the markup on goods, raw materials or services, as well as on the availability of discounts and promotions;
Business reputation of the company. Supplier and customer loyalty definitely impacts a business's bottom line.

Finally, we should consider the production factors on which the profitability of small businesses in Russia largely depends:

Volume of trade turnover. By increasing sales volume while maintaining a constant markup, the company can make more profit;
Structure of trade turnover. The introduction of new items into the assortment leads to an increase in the number of customers by expanding the target audience, and improving the quality of the product allows you to set a higher markup;
Organization of the sales process. To increase sales volume, it is also recommended to use the most progressive and modern marketing methods;
Quantitative and qualitative personnel composition. Growth in production capacity depends on the availability of a sufficient number of skilled workers;
Labor productivity. With an increase in labor productivity, the share of overhead costs per unit of production decreases;
State of the material and technical base. A company with modern equipment can increase its turnover. At the same time, the wear and tear of fixed assets prevents this process.

How to increase profitability?

High profitability is a significant competitive advantage in today's market. Of course, an entrepreneur must pay attention to all factors that directly or indirectly affect the value of this indicator, including seasonal fluctuations in demand, the amount of production costs, the activities of competitors, changes in the share of defects in the total output, returns and forced downtime of the production line caused by various reasons. Listing the most common technologies used to solve the problem of increasing profitability, it should be mentioned:

Artificial increase in profitability. When planning to increase selling prices, you need to take into account both the general situation on the market and the competitiveness of the product;
Increased production capacity. Modernizing equipment or purchasing new automatic machines will increase production capacity and save on labor resources;
Improving product quality. Also, modernization of technological lines can lead to an increase in the quality of the product and an increase in demand for it;
Improving marketing strategy. A significant expansion of the target audience is achieved by choosing the most effective methods of promotion;
Cost reduction. An enterprise must constantly look for suppliers who are willing to offer raw materials, materials and services of similar quality at a lower price. Obviously, this will lead to lower costs;
Reduced payroll costs. Large companies do not reduce their staff, but transfer it to other regions and countries where they can find inexpensive labor.

The most profitable types of business

When compiling a rating of business profitability in Russia 2018, you need to understand that different indicators are considered normal in different industries. High ratios are not necessarily characteristic of the most profitable types of activities: sometimes only thanks to increased profitability a company can compensate for its risks. So, in the field of industrial production, the average indicators are as follows:

Operation of transport systems for oil and gas - 90%;
Cement production - 85%;
Production of agricultural fertilizers - 85%;
Non-ferrous metallurgy - 65%;
Rolled metal production - 40%.

In the field of finance and banking services, the list of types of businesses with high profitability in 2018 includes:

Clearing services - 70%;
Brokerage services in financial markets - 60%;
Maintaining securities registers - 45%.

Finally, in the sphere of production of goods for the population, the following look attractive:

Production of tobacco products - 45%;
Beer production - 30%;
Production of household appliances - 25%.

How do you know in which business high profitability is an integral characteristic of the activity? Typically, such indicators are typical for niches in which the acceptable markup on a product is hundreds and thousands of percent. This is possible given the simultaneous presence of increased demand and low levels of competition.

Theoretically, a high markup is achievable in any business: to achieve this, one should produce or sell piece or designer goods that claim exclusivity. However, some types of products are considered high-margin due to objective reasons: with a low cost, they are extremely in demand among customers.

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What types of businesses fit this description:

Sale of underwear. Sellers add 250–300% to the cost of goods in the mid-price segment. When selling designer and exclusive lingerie, the markup increases to 1000–1200%;
Selling glasses. The markup on regular glasses is 300%, while frames and sunglasses are sold with a margin of up to 500%;
Selling cotton candy. Among other types of fast food, cotton candy is characterized by the highest markup, sometimes reaching 4000%;
Selling popcorn. The average markup on regular popcorn is 600%. When adding flavoring fillers, it increases to 1000%;
Sale of jewelry. Mass models are sold at a 300% markup. Designer jewelry and handmade goods bring a businessman up to 1000% profit;
Coffee house. Coffee is usually sold at a 400% markup. By adding desserts, sales profitability can increase by up to 600%;
Sale of wedding goods. They don’t skimp on wedding goods, which is what traders take advantage of, selling them at a markup of 350–500%;
Sale of khinkali. To prepare the dish, they use affordable, inexpensive ingredients, so the markup reaches 300%;
Flower shop. Usually flowers are sold at a premium of 200–250%, and on holidays they increase it to 600–800%;
Selling ice cream. The average margin when selling ice cream is 250%. Points in shopping centers sometimes increase it to 600–800%;
Pancake house. The ingredients for preparing the dish are also inexpensive, which allows you to set a markup of up to 300%;
Smoothie bar. Fruit and vegetable drinks are positioned as elements of a healthy diet, so the markup on them reaches 1000%.

Conclusion

When calculating profitability indicators, it is necessary to understand that they do not always represent full-fledged characteristics of the enterprise. Thus, with long-term investing, the values of the coefficients turn out to be low, so they need to be calculated for different periods and different conditions. In addition, assets usually change their value over time: accordingly, a calculation made on the basis of one-time measured parameters may turn out to be incorrect.

Finally, a single profitability ratio does not allow us to fully assess the risks accompanying the activities of a particular enterprise. To get an adequate idea of the company's performance, in addition to this tool, you need to use other analysis methods - for example, calculating financial stability, studying the cost structure, analyzing management efficiency and much more.

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For all, without exception, owners and managers of enterprises, organizations or companies, unprofitability is the most terrible word. This phenomenon indicates the inefficiency of entrepreneurial activity, which leads not only to a lack of profit, but also to debt.

What is profitability and why is it important?

The profitability indicator is the most significant, as it illustrates the profitability of the organization. When analyzing it, experts study the actual figures at the moment and the dynamics of changes in the indicator for previous periods. The value is determined by the ratio of net profit to the amount of expenses.

A profitable enterprise shows a positive indicator, that is, its profits exceed expenses. The unprofitability of an enterprise is, in other words, its unprofitability. In fact, unprofitability is a value of an indicator less than one.

Why analyze negative profitability?

Strictly speaking, they are called conditionally, emphasizing the inefficiency of the enterprise. If the analysis of economic indicators reveals unprofitability, this means that there are shortcomings in the production process, marketing or management strategy. The numerical value of negative profitability shows how difficult the situation is in the company, and also clearly illustrates the impossibility of further functioning of the organization as usual (after all, if expenses exceed profits, the problem only gets worse over time).

What is the unprofitability of an enterprise in certain categories?

A general decrease in profitability may be caused by the influence of one or more factors. To identify “weak links” and find out the intensity of their impact on the overall unprofitability of the enterprise, economists resort to calculating indicators of personnel, fixed assets, products, sales, and many other categories.

They are determined by replacing the sum of total expenses in the denominator of the fraction (profit/total expenses) with the costs of maintaining personnel, the cost of production assets, and the cost of production.

What does low return on sales indicate?

The lack of profit from the sale of manufactured products indicates the presence of an error in calculating prices. Unprofitability arose due to the low price, which does not cover the costs of manufacturing, transportation and advertising of goods.

The increase in the value of negative profitability is proportional. If we are talking about an indicator of minus 20% or less, then the manager should seriously think about introducing innovations and radical measures. Otherwise the business will have to close.

The same situation is observed when calculating; however, the denominator becomes costs and sales of products in monetary terms.

Personnel play an important role in the activities of any organization. More precisely, it makes the greatest contribution to the financial success or failure of the enterprise. shows how much the costs of maintaining employees and their jobs pay off.

In case of disappointing or downright low performance, the manager is forced to take measures to reduce costs or increase employee productivity. Savings can be achieved by reducing payments (bonuses, bonuses, remunerations) or by laying off part of the staff.

At the same time, introducing strict discipline and improving the motivation system can quickly increase key indicators.

Unprofitability is a warning sign for investors

By investing in the development of an enterprise, the investor expects to subsequently receive. Under the terms of the agreement, he is provided with reliable information about the unsuccessful management and financial problems of the owner of the organization.

Since unprofitability is negative profit, the value of the company's shares will soon decrease greatly. Most experienced investors do not wait for the situation to worsen and withdraw funds from the project.

At the same time, in some cases it makes sense to wait for the stock price to level out and stabilize: for example, in case of temporary unprofitability, which will disappear when losses and expenses are reduced.

Instructions

The formula for profitability (overall efficiency) of an enterprise looks like this: R = (P / E)*100%, where
P – useful final results in monetary terms;
E – costs to achieve this result in monetary terms.
It should be noted that in relation to an enterprise or the activities of a private entrepreneur, profitability is calculated over a certain period of time - most often it is a month, quarter or year. In this case, the final results and costs for the selected period of time exactly correspond to the balance sheet indicators for the corresponding period (income and expenses, respectively). The same rule is true for the group and even the industry as a whole. True, in this case you will often have to resort to statistical estimates and errors.

Take for example a small agency that sells tickets to concerts and performances. It is necessary to calculate its quarterly profitability. The conditions of the task are such that the agency acts as an intermediary and does not need its own tickets. It employs: a director, an accountant, 12 full-time and 70 freelance ticket distributors, and 4 drivers with their own vehicles. From time to time the agency resorts to the help of legal consultants. The agency also has its own sales office.

Enterprises that manufacture products independently determine the size of profitability and the price of products, with the exception of only certain types of activities: the provision of funeral services, various types of transportation. For these types of activities, government agencies have established profitability levels.

When setting the price level in market conditions, enterprises are forced to focus on market prices if the manufacturer is not a monopolist. Therefore, the possibilities for determining profitability are limited.

To increase the quantity of products produced and sold, it is necessary to include a low price in the price, then the price level will be lower than that of competitors. And in this case, the manufacturing company receives an additional advantage in the market, and sales growth increases sharply. And with an increase in the scale of activity, the average cost decreases due to the distribution of constants over an increased number of products. As a result, a large amount of profit is generated due to faster turnover of funds.

note

A decrease in profitability is caused by failure to meet the profit target and an increase in production assets.

Helpful advice

The most difficult moment during pricing is the justification and determination of the profitability of the product, which is included in the price of the product. On the one hand, profitability should provide the company with the desired amount of profit, and on the other hand, it should allow it to act as a full participant in the market.

Sources:

profitability rate

Tip 7: How to Calculate Return on Equity

Return on equity is the most important indicator of the efficiency of an enterprise. Like other profitability indicators, it is a relative value and determines the return on equity capital.

Instructions

The return on equity indicator characterizes the amount of profit that the owners of the enterprise receive on their invested capital. It is calculated as the ratio of the profit remaining at the disposal of the company, multiplied by 100, to the volume of equity capital (Section III of the balance sheet). The dynamics of this indicator influences the level of quotes and shows the quality of management of the advanced capital.

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Tip 9: How to calculate the profitability of your core business

By calculating several financial indicators based on analysis of balance sheet data, you can partially assess the financial condition of the enterprise. On the other hand, using the calculations presented below, any enterprise can make a partial assessment of the financial condition of its own counterparties to whom products are supplied.

Instructions

One of the key business indicators that shows the success and efficiency of any company is the profitability of its core activities. Profitability ratios characterize the profitability of a company. Along with other financial analysis ratios, profitability is calculated based on balance sheet data. These include a balance sheet (Form No. 1), a profit and loss statement (Form No. 2) and a number of other documents. However, to calculate the profitability of the main activity, these two are sufficient.

The core activity profitability ratio (OA) shows the amount of net profit received by the company from 1 ruble spent on production. With an effectively organized business process, this indicator should grow over time. To get it, divide the sales profit from the income statement by the cost of production. For convenience, use the formula linked to form No. 2:

OD profitability ratio = sales profit / production costs.
OD profitability ratio = line 050 / (line 020 + line 030 + line 040).

Another important indicator of the company's financial condition is the ratio. From the OD ratio, it shows the amount of net profit that every 1 revenue brings to the company. The growth of this ratio increases the profitability of core activities and improves the financial condition of the enterprise. To calculate the return on sales ratio, use the formula (based on form No. 2):

Return on sales ratio = profit from sales / from sales.
Return on sales ratio = line 050 / line 010.

Along with indicators of profitability of activities, other coefficients are also used in financial analysis. For example, business activity ratios, which reflect the efficiency of the company's use. These include the turnover ratio (an indicator of the efficiency of using all the funds at the enterprise’s disposal), inventory turnover (the rate of sale of inventory in days) and other indicators.

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Sources:

main profitability ratios

Return on capital is the use of capital when the organization fully covers its costs and makes a profit. The profitability indicator allows you to evaluate the efficiency of capital use. This relative ratio is less susceptible to inflation than absolute indicators, since it is expressed in the ratio of profit and advanced funds.

Instructions

A general indicator expressing the efficiency of the entire capital of an enterprise is the return on total capital investments. This indicator is determined by the formula:
RK = (P + P) x 100% / K, where
P – costs associated with attracting borrowed sources,
P – profit remaining at the disposal of the enterprise,
K – the value used at the enterprise (balance sheet).

Return on equity analysis calculates the return on invested and equity capital. Return on invested capital is defined as the ratio of the organization's net net to the average annual cost of invested capital.

Invested refers to capital invested in the main activities of the company. In other words, this is the sum of current assets in activity, fixed assets and other assets. With another method of calculation, invested funds mean the amount of equity capital and long-term liabilities of the organization.

The main thing to consider when calculating invested capital is that only the amount of capital that goes to generate profit should be included in the calculation. Sometimes the calculation is carried out for the entire activity of the enterprise, without highlighting the main one. The error in this case will depend on the amount of operating profit of the company and the amount of investment in non-core activities. In this regard, the return on invested capital can be found as follows: (operating profit x (1-tax rate)) / (long-term