# Key profitability indicators: formulas

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The work of any company needs a constantevaluation. This makes it possible to determine the weak and strong features of the organization of financial, investment and operating activities. To do this, analysts apply a variety of techniques. A very important place in the valuation system is occupied by profitability indicators, the formulas for determining which allow us to assess the feasibility of the enterprise. This approach involves examining several indicators. This will provide a comprehensive look at the state of the financial institution. To correctly understand the profitability indicators, you need to study the essence of their calculation formulas.

## The concept of profitability

To assess the profit indicator that the enterprise received in the reporting period, it is not enough simply to analyze its dynamics.

After all, it can increase, but it will beGrow both costs, and the cost of production assets. Calculating by means of formulas the indicator of profitability on balance, it will be possible to reveal, in what period the amount of fixed capital and working capital was smaller with the growth of profit.

The profitability indicators, the formulas of which will beare considered further, allow to estimate relative indicators of efficiency of activity of the company. This can be done by comparing the number of costs and their returns during the operational period.

Profitability is profitability (profitability)enterprise. One of the most important indicators for analysts, investors and management. To understand how the company worked effectively in the period under review in the context of its various spheres of activity, the formulas of the basic indicators of profitability are used.

## Methodology

To assess the effectiveness of activitiescompanies, the analyst must correlate profits with the resources that generated it. Indicators of profitability of the enterprise, the formulas of which are used in the methodology, can be expressed in the profits that the whole product bears, or in the unit of capital invested in it.

Depending on what kind of profit is compared with certain resources of the company, the types of evaluation are also differentiated. The most commonly used of them are only 4 coefficients:

• assets;
• sales;
• direct costs;
• general activities.

You can also analyze the profitability of your capital.

## Return On Assets

Profitability indicators, balance formulaswhich provide an opportunity to make an assessment of the efficiency of the use of capital, are compulsorily calculated. These are the main production indicators.

This approach evaluates the wisdom of decisionsleadership in the field of invested capital. The amount of the balance currency is considered here. To understand the correctness of its structure, use other methods of conducting an analytical assessment.

For the calculation it will be necessary to consider the data of the enterprise's accounting reports, such as Form No. 1 called "Balance Sheet" and Form No. 2, which is called the "Profit and Loss Statement".

The formula for profitability of assets has the following expression:

RA = PE / (ВБнп + ВБкп) / 2, where PE is a net loss or profit, ВБнп, ВБкп - balance currency at the beginning and end of the reporting period.

## Profitability of sales

The formula for profitability of sales is also an important factor in studying the effectiveness of the company.

It allows you to estimate the amount of profit the organization earns from each unit of sales.

Profitability of sales, the formula of whichpresented below, will help to understand how much the enterprise can retain after financing the cost of finished goods, paying taxes and interest on credit obligations. This approach shows the profitability of the issue, allows you to weigh its share in sales.

Formula of profitability of sales:

РП = ЧП / ВР, where ЧП - a net loss or profit, ВР - an income from realization.

## Return on direct costs

The next step in the analysis is the profitability of direct costs. It allows you to assess what return brings the total capital of the company, which it owns.

That is, it is a good opportunity to evaluate and draw conclusions about the amount of profit that the company retains in the organization of the production and sale of products.

Profitability indicators, calculation formulaswhich will be discussed further, will present data on the appropriateness of using capital and will show how much resources the enterprise spent on obtaining net profit.

The formula has the following form:

РПЗ = ЧП / С, where ЧП - a net loss or profit, С - the cost price.

You can also consider the income from sales, gross income, etc., instead of the net profit indicator. Everything depends on the goals set for the financial analyst.

## Profitability of general activity

The easiest way to assess profitabilitycompany in the reporting period is the calculation of the profitability of the enterprise. The formula will be presented later. To understand the essence of this method, it is necessary to understand the essence of the compared articles of Form No. 2.

This is a very important approach in the system thatform the main indicators of profitability. Formulas for determining the overall profitability of the company compare the amount of profit before taxes and the proceeds from the sale of goods in the reporting period. It looks like this:

RPM = PN / BP, where PN is the profit (loss) that the company received before paying its tax obligations, BP - revenue (revenue) from sales.

## Profitability of own liabilities

It is very important for both investors and management companies to determine the profitability of their capital.

It shows how much the owners and investors get from the unit of capital invested in the activities of their company. The formula is this:

РСК = ВР / (ВБнп + ВБкп) / 2, where ВР is the production value, ВБнп, ВБкп - the balance currency at the beginning and the end of the period under consideration.

The profitability of the company's own funding sources can more fully describe the formula of DuPont. It can be expressed as follows:

RSK = PP / BP × BP / WB × WB / SC, where PE is a net loss or profit; WB - the sum of assets; BP - revenue (revenue) from sales; SC - own liabilities.

## What to consider

Profitability indicators, the formulas of which were presented above, suggest to take into account a number of other aspects.

• Time of analysis. The presented methodology does not take into account the return in the long term from the use of long-term investments. It is better to evaluate the coefficients in the dynamics.
• The incompatibility of monetary units. Profit reflects the results of current activities, and capital (balance sheet) formed over the years. For the accuracy of the assessment, the market value of the company's assets should be taken into account.
• High profitability can be achieved withsignificant increase in risk. Therefore, it is necessary to calculate a number of related indicators (financial, operating leverage, structure of current costs and financial sustainability).

Profitability indicators, the formulas of which werepresented in the context of several aspects of the assessment, allow us to conclude about the feasibility of the company. Comparing the amount of expenses with the value of the results obtained due to them, one can understand whether the enterprise is profitable or the activity of managers was ineffective in the analyzed period. Given a number of objective aspects when conducting such a study, analysts get fairly accurate results. Conclusions that are made on the basis of the calculations carried out can improve the state of activity of each organization.