The formula by which profitability is calculated. Profitability of core activities - calculation formula

Return on sales measures how much of a company's revenue is profit.

The return on sales formula is calculated for a certain period of time, the unit of measurement is percentage. The general formula for finding return on sales is as follows:

Рп=(П/В)*100%,

where Рп – profitability of sales,

P – enterprise profit,

B is the company’s revenue.

Types of profitability of sales

When calculating return on sales, different types of profit are used, so there are different versions of the return on sales formula. Let's look at the most common types of return on sales:

Return on sales in accordance with gross profit, which is calculated as the quotient of gross profit divided by revenue (in percent):
Rp(VP)=(Pval/V)*100%
Operating return on sales, which is the quotient of profit before tax divided by revenue (as a percentage):
Rp(OP)=(Pop/V)*100%
Return on sales in accordance with net profit, which is the quotient of net profit divided by revenue (in percent):
Rp(ChP)=(Pch/V)*100%

What does the return on sales formula show?

Using the return on sales formula, you can find a coefficient that shows what part of the profit will come from each ruble earned. The values found using the profitability formula will differ for each enterprise, since their product range and competitive strategies differ.

Most common three types of return on sales and they show:

Gross profit margin shows how many percent of gross profit is in each ruble of goods sold;
Operating return on sales will show what share of profit will be accounted for for each ruble that is received from revenue from which interest and taxes have been paid;
Return on sales based on net profit reflects what share of net profit will fall on each ruble earned.

Determining the profitability of sales helps to optimize the pricing policy of the enterprise, as well as costs that relate to commercial activities.

The meaning of the return on sales formula

Return on sales is often called the profitability rate, since this indicator reflects the share of profit in revenue.

When analyzing the coefficient that characterizes the profitability of sales, it is important to note that if the profitability of sales decreases, this indicates a decrease in the competitiveness of the product and a decrease in demand for it. Then the company’s management should think about carrying out events that help stimulate demand, increase the quality of products sold, or conquer a new niche in the market.

By identifying trends in changes in the profitability of sales over time, economists distinguish between the reporting and base periods. As the base period, the indicators of previous years (years) when the company received the greatest profit are used.

Formula for calculating profitability of sales on the balance sheet

Determining the base period is necessary to compare the return on sales ratio for the reporting period with the ratio that is taken as the basis.

Examples of problem solving

Profitability calculation

The concept of profit from sales

The commercial activities of any company in most cases are aimed at generating profits to cover losses (costs).

Profit includes the net income that a company receives in the process of carrying out certain business activities (sale or production of goods, provision of services). The concepts of profit and revenue cannot be considered equivalent, since profit is determined by subtracting from revenue the main cost items for production, among which are:

Cost of goods (services),
Payment of taxes (income tax, excise taxes, VAT, etc.),
Export taxes, etc.

The following components of any company’s work depend on the sales profit indicator:

Efficient operation of enterprises,
Solvency,
Degree of liquidity.

An enterprise can use profits from sales to finance itself, which leads to an increase in the pace of modernization and automation of the production process.

Sales profit formula

There are many ways to calculate company profits, but the basic formula for sales profits looks like this:

Pr=Vyr-Seb-Nal

Here Pr is the amount of profit from sales,

Vyr – the amount of revenue from sales,

Cash - taxes,

Seb – cost of goods (services).

According to the second calculation option, profit from product sales is calculated as follows:

Pr=VP-Rupr-Rcom

Here VP is the amount of gross profit,

Rupr – administrative expenses,

Rcom – expenses of a commercial nature.

Factors affecting sales profits

The sales profit indicator depends on many internal and external factors.

Internal factors influencing sales profit are:

The quantity of products sold (manufactured), which depends directly on profitability (as profitability increases, sales and profit from sales increase).
Assortment structure.
Product prices (as prices rise, profit margins increase).
Cost (as it increases, profit decreases; by reducing cost, profit margins can be increased).
Business expenses.

External factors do not have a direct impact on the amount of profit from sales; they do affect the final volume of products, including its cost. The following external factors can be listed:

Deductions for depreciation,
State influence
Conditions of nature
Market sentiment (impact of supply and demand), etc.

Functions of profit from sales

The formula for profit from the sale of goods (services) is used in the process of analyzing the economic activities of enterprises for a deep understanding of the definition of profit.

Using the most important functions of profit from sales, a manager can:

Characterize the final result of the company’s activities,
Identify indicators such as efficiency and stability,
The incentive function, subject to increasing profits from sales, allows you to increase wages, introduce new technologies, increase the rate of renewal of fixed assets,
Make deductions of taxes and other payments to the state budget, carrying out the fiscal function of profit;
Implement measures in the field of optimization of the production process through the profit control function.

Examples of problem solving

Return on sales is an indicator of the economic efficiency of activities. It is expressed as a percentage and allows you to determine the share of profit in the company's revenue.

For the calculation, you will need data on profit and sales volume for a certain period.

Calculation formula

Рп = (P/Op) x 100%, where:
P - profit;
Op - sales volume.

The above is the general formula. Depending on the final goals of the analysis, you can take the values of operating, gross or net profit for calculation. Indicators must be reduced to numbers of the same order (if sales volume is in millions, then profit should also be in millions).

Calculation example

Initial data for calculating the profitability of sales of an online store of handicraft goods for the first quarter. 2015:

gross profit - 275 thousand rubles;
revenue - 632 thousand rubles.

Gross profit margin - 43.5%.

To understand whether the company performed more efficiently in the first or second quarter, you need to compare the indicators of these periods. For example, revenue in the second quarter amounted to 840 thousand rubles, and gross profit - 322 thousand rubles. Profitability, respectively, is 38.3%. Thus, in the II quarter. in each ruble received, the share of profit was 5.2% less than in the first.

Why do you need to calculate profitability?

The calculation is necessary to analyze the financial and economic activities of the company. The indicator can act as an estimate when comparing two companies. In this case, costs and pricing policies of enterprises are compared.

The higher the value, the more efficiently resources are used and the more competent pricing policy of the enterprise is pursued. A low indicator indicates problems with profitability.

How to calculate profitability as a percentage?

You can increase it in different ways; usually you need a set of measures aimed at:

cost reduction;
increasing the final price of the product;
review of the composition of the manufactured product;
withdrawal of unprofitable units from circulation.

It is best to analyze dynamics over several months or years. This will allow you to trace the general trend and identify the weaknesses of the enterprise.

Profitability in dynamics using the example of an online store for handicrafts

Table 1. Profitability of an online store over time

Image 1. Profitability of an online store over time

In the online store from the first quarter. 2013 to Q1 In 2015, there was an increase in profitability by 11.5%. At the same time, the graph shows fluctuations in the II and III quarters. 2013 and 2014 The drawdown is associated with the seasonality of demand for handicraft goods. The peak of sales is observed in the winter period before the New Year; at this time, ready-made sets that are taken as gifts are in demand. In general, the store's dynamics are positive.

Questions and answers on the topic

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Profitability refers to the concept of the degree of income, benefit, profit of the activity of an enterprise or entrepreneur. Calculations are carried out through a system of relative indicators, which reflects and describes the efficiency of the enterprise in all areas: production, investment, commercial.

Profitability of core activities- this is the organization’s ability to manage finances (cover expenses with profitability), as well as their accumulation.
Through it, the testimony assesses the level of activity of the enterprise and the real possibility of its participation in the political investment arena.

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What reflects the profitability of core activities

The profitability of core activities reflects the final result of the activity. The profitability value reflects the proportion of efficient use of resources.

By characterizing the profitability of an organization’s activities, experts identify the weak and strong aspects of the functioning of a business even before the start of its active organization, that is, at the ideological stage.

Commerce of any company correlates directly with the country’s internal economy and its commercial principles. The minimum resources of the core activity of the enterprise must be transformed into maximum results.

Assessment and calculation of the level of implementation of economic principles in the activities of an enterprise allows us to obtain an analysis that includes all economic indicators. The key point in the analysis is to determine the criterion for assessing profitability.

It is worth considering that income is not the main sign of the effective operation of an organization or its dynamics. For profitability, profit acts as one of the indicators that must be compared and contrasted with each other in different ways.

Profitability of core activities formula on balance sheet

In economics, there is no single definition of profitability, terminology and methodology for its planning and analysis of calculations.

How to calculate

Characteristics of productivity dynamics are necessary for calculating the profitability of an organization. The income indicator is, in fact, profitability. It is this indicator that shows the uniform and efficient use of natural, labor, financial, and economic resources. For commercial enterprises, the accuracy of these readings is important, while non-profit enterprises do not need this.

When calculating profitability indicators, the following factors are taken into account:

cost of production goods/services/work;
cost price of a commercial enterprise;
cost of management costs;

Formula:

R = pr / 3 * 100%

R– this is profitability;

etc– net profit/income of the organization for a specific period or for the entire period of its existence;

3 – costs/expenses for improving production, financial costs.

Also, the enterprise can use a formula for a narrower profile - return on assets turnover.

This means that you need to calculate the organization’s income personally or separately from each division, invested in turnover assets, and their effective use. The ratio of current assets and net profit (with calculated taxes) is taken into account.

Total = chp/oa

General– general profitability indicator;

emergency- net profit;

oa– cost of turnover assets;

The higher the indicator obtained from the formula, the more expensive the cost of assets and their active use.

Rp = Pn/N or Rp = Pch / N

Rp– profitability;

Pn- revenue from sales;

PH- net profit;

N– proceeds from sales;

Rp = (N – S – КP – УP) / N * 100% = X;

X = (P/N) * 100%

Rp– profitability;

S– cost of goods sold;

KP– commercial costs/expenses;

UP– administrative costs/expenses;

X– coefficient calculated in the first formula.

Profitability calculations allow organizations to be classified into groups:

low-profit organization - with an indicator from 1 to 5%;
medium-profitable organization - with an indicator from 6 to 20%;
highly profitable organization - with an indicator from 21 to 30%;
ultra-profitable organization - with an indicator of 31%;

Net profit is the only indicator that reflects the potential dynamics of production.

Calculation example

Factor analysis and calculation of profitability of goods sales:

Data– 1 year, 2 year, 3 year.

Initial indicators– (thousand/rubles).

Sales revenue – 155287, 189879, 198365.

Cost of goods/services/work – 122420, 136517, 142698.

Commercial surplus – 32566, 26578, 68742.

Profit from sale – 3540, 2576, 2597.

Profitability of sales – 2, 3.15, 3.16.

Changed return on sales +1.02, +0.2.

Based on the data in the table above, we can conclude:

For three years in a row, the organization has achieved sales profitability with an annual increase. For 2 years the indicators did not change sharply, the direction of influence of the factors was static. Increasing the volume of sales of goods/services/works, the value of influencing factors for the second year amounted to 13.4%, and for the last reporting year - only 5.36%. but the increase in the cost of goods/services/work and commercial surpluses only reduced the level of profitability of the enterprise’s core activities.

Analysis of the profitability of core activities

When analyzing various factor indicators of the efficiency of an enterprise, the profitability of sales itself must certainly be used. A commercial enterprise is characterized by system indicators that depend on and influence each other.

Reserves and factors influencing the growth or decline of profitability:

cost reduction;
commercial surplus;
other surplus;
sales revenue;
gross income;
strengthening the turnover of capital and property;

To improve the efficiency of profitability, the organization must constantly take care of high revenue and gross income, compared with the values of previous years.

Analysis of the profitability of the organization’s core activities is necessary not only to determine the strengths and weaknesses of production, but also to calculate the factors influencing the result.

The profitability of the main activity of an enterprise is a key link for obtaining indicators of the dynamics of financial and economic areas at the same enterprise. Moreover, profitability indicators reflect the necessary data on the use of financial resources and job prospects.

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 draft 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. Profit margin is usually expressed as a percentage, and the higher the percentage, the more profitable the business is.

Steps

Part 1

Profit margin calculation

Understand the difference between gross profit margin, 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.

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.
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 activities, 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 your business's characteristics, 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.

The concept of enterprise profitability consists of several estimates that need to be calculated using special formulas and the resulting indicators analyzed. Based on the profitability ratios, we can conclude how well the company uses its available resources. If the calculations show disappointing results, it is necessary to reconsider the company's management scheme.

The simplest assessment of profitability

The overall profitability of an enterprise is calculated very simply. The formula in this case is as follows:

P = P/Z × 100%.

It deciphers like this:

P – profitability;
P – profit for a particular period of time;
Z – costs for the same period.

First, determine for yourself the period for which you want to receive performance data. This could be a quarter, a year or six months.

To evaluate performance, it is best to express profitability as a percentage. This way, it will be clear how profitable your business is. You will find out how much profit you received for each ruble spent.

You can use another formula in which calculations are based on balance sheets:

P = Bp/Ca × 100%.

To carry out the calculation, you will need to take the current balance sheet and accounting documents. The given formula is deciphered as follows:

P – overall profitability.
BP – profit on the balance sheet. You can take this value from the report on form No. 2 in the cell with code “2300”. You can also calculate it yourself. To do this, you need to take the revenue for the reporting period and subtract from it the cost of production, management and organizational expenses. Please note that the tax burden does not need to be deducted.
Sa is the total value of assets. It is available in Form No. 1 of the balance sheet. This amount reflects the total cost of production assets, assets in circulation and outside of it.

However, the information received will not be enough to assess the real state of affairs of the company. To know for sure that the production of goods or services is successful, it is necessary to calculate each of its segments separately. So, you can find the weak link of your company and strengthen it. It is best to compare indicators over time, that is, first calculate profitability by segment for the previous reporting period, and then for the just completed one. This will help you determine how successful the enterprise is, whether there is progress in its development and whether anything needs to be changed in the company's activities.

How to evaluate a company's efficiency using the concept of production profitability

Based on this calculation, you will be able to assess the current state of production processes, after which you can make adjustments to the operation of the enterprise.

The calculation is carried out according to the following algorithm:

Look at the balance sheet and write out a line about profit (Pp).
Calculate the amount of fixed assets, take the values as of each month.
Add up the fund values at the beginning and end of the year, then divide the resulting figure in half.
Divide the result for the previous points by 12, so you will get the average indicator (Of) for the month in the reporting period.
Take data from the company's balance sheet to get the average cost of working capital (CW) for the year.
Calculate the profitability of production using the formula: Rpr = P/ (Os+Of).

This type of calculation is more difficult, but the data obtained will allow you to find out how much profit you get from each ruble spent on production costs. If the obtained figure does not satisfy you, then you need to draw up an action plan to increase the efficiency of production processes.

Let's look at an example. After assessing the profitability of enterprise A, unsatisfactory results were obtained: despite huge financial costs, profit remains at a minimum level. In this case, it is possible to reduce the costs of production processes, as well as take measures to rationalize the use of resources at the enterprise, which will allow, at costs fixed at the level of the previous reporting period, to increase production output.

We evaluate the performance of invested capital

When calculating the performance of assets, it is impossible to give an unambiguous assessment of whether they perform their role “well” or “badly.” If you get an unsatisfactory result, this means that the capital investment is not working and is gradually starting to melt away. At the same time, the high profitability result again cannot be called good, because part of the funds must be sent to the reserve in case of a crisis.

So, to calculate return on assets, you will need to do the following:

Determine the period of time and find out information about the volume of sales that were produced during this period. The easiest way to do this is through accounting, because it is there that data on payment for products or their shipment to customers should be stored.
Calculate the cost of production.
Calculate the amount of fixed costs for this period.
Find out the amount of tax payments
Calculate your net profit. To do this, add up the fixed costs, production costs and tax burden. You will need to subtract the amount received from your sales volume.
Pull up the financial statements and find out the value of the company's assets. To do this, you need to subtract debt obligations to banks from your own capital and add the amount of funds that were transferred to other companies for temporary use.
Divide net income by asset value to get profitability figures.

You should not determine at your own risk which portion of assets to put into reserve. This requires a serious analysis of economic indicators, which can only be performed by professionals.

Step-by-step assessment of return on sales

We will present the following algorithm for estimating sales. This calculation simply needs to be done in cases where the overall profitability of the enterprise leaves much to be desired, and production indicators and asset performance are highly rated.

Decide on the period of interest. It is best to analyze the same period as in previous calculations.
Calculate the total revenue from the sale of your services or goods.
Specify in the accounting reports the profit remaining on the company's balance sheet after taxes.
To obtain profitability, divide net profit by sales revenue.

It is best to calculate profitability over two periods. This will help you understand how effective your marketing strategy is in terms of sales dynamics. Revenue growth cannot be called a positive result, because its ratio to profit may, on the contrary, be stagnant.

If the profitability indicator decreases, a more thorough analysis will be required. For example, you will need to track the dynamics of sales to an individual client or make calculations by product groups. Based on the results of a detailed analysis, revise your product range or work on your customer base to increase profitability.

Please note that sales may be affected by external factors such as financial crises, changes in exchange rates and the level of welfare of the population.

Break-even calculation

Calculating the company's break-even point will help you draw up a business development strategy. It represents the level of profitability at which the volume of sales and production will allow the enterprise to make a profit rather than incur losses. At this point, the company's income completely covers its expenses.

Calculations are carried out according to the formula:

Pr = Pz/Kvm

The formula is deciphered as follows:

Pr – profitability threshold;
Pz – the amount of fixed costs for a certain period;
Kvm – gross margin coefficient.

The margin ratio can be calculated by subtracting the amount of variable costs from revenue. Divide the resulting figure by revenue.

To obtain a stable profit, the company must adhere to such a course that sales volume is above the break-even point, and variable costs are at the same level. Otherwise, the company will suffer losses.

Many entrepreneurs evaluate the performance of their business by the amount of profit received. Profit is wonderful, but it is not possible to determine by its indicators how effectively a company uses the resources at its disposal. To analyze cost-effectiveness, profitability ratios are usually used. In its broadest sense, profitability is defined as the percentage relationship between profits and costs.

Profitability indicators are a tool for financial analysis, activity planning and implementation of measures to improve its efficiency, as well as one of the criteria for assessing the investment attractiveness of an enterprise.

How to calculate profitability? First of all, it is necessary to identify goals: assess the general state of affairs of a potential partner or analyze the profitability of your own production, sales and financial management, etc. Based on this, relevant data from the balance sheet and direct performance indicators are taken. Typically, to determine the profitability of an enterprise, the efficiency ratios of production, sales and assets are considered.

Enterprise profitability

Based on aggregated indicators, the profitability of an enterprise is assessed simply: net profit for a certain period of time is divided by the sum of all expenses incurred over a given period of time. The resulting ratio can be expressed as a percentage by multiplying the result by 100.

Thus, the degree of efficiency with which the enterprise distributes working capital, property and other means of production is clearly demonstrated. The economic meaning of calculating overall profitability is to see in digital terms the profit that is received for each conventional ruble spent.

Based on financial reporting data, profitability can be calculated using a formula that, in a simplified form, looks like this:
P=BP/SA*100%,
Where
P – profitability;

BP – balance sheet profit, equal to the revenue for the reporting period minus the cost of production, organizational and management expenses, but before taxes. The required value is indicated in the profit and loss statement in Form No. 2, in line with code 2300 “profit before tax”;

CA – total value of assets, includes the cost of production assets, current and non-current assets. This data is in the balance sheet (form No. 1).

As you can see, calculating the profitability of an enterprise is quite simple. However, the information received does not provide much in terms of reflecting the real state of affairs. What are the dynamics of development (is there growth, decline or stagnation), what is the contribution of one or another area of the enterprise’s activity to the current results, whether a “subsidence” in sales or production is beginning or already exists - all these questions can be answered if you analyze the profitability for each production link and compare it with previous reporting periods.

Production profitability as the main indicator of enterprise efficiency

One of the most important characteristics of the efficiency of an organization’s economic activities is production profitability. Based on the analysis of this indicator, an assessment of the current state of production processes is based, and decisions are made to correct them. If the level of profitability is not high enough, this is a reason to develop an action plan to improve performance. In particular, production profitability can be increased by reducing production costs, rationalizing the use of resources and equipment, etc.

Based on the balance sheet data, it is necessary to determine the balance sheet profit.
For calculations, you will need to know the average annual cost of the company's fixed assets, that is, tangible assets, the depreciation of which takes part in the formation of the cost of production. To do this, it is necessary: a) sum up the value of fixed assets as of the beginning of each month; b) add up the value of these funds at the beginning and end of the year, divide this amount by 2; c) divide the total result for points a) and b) by 12, according to the number of months in the reporting period.
The average cost of working capital for the year is calculated according to the balance sheet of the enterprise.
Profitability is defined as balance sheet profit divided by the sum of the average annual cost of working capital and fixed assets, that is, Rpr = BP / (OF + OS).

Calculating production profitability can be quite labor-intensive, but it gives a clear idea of how much profit is generated from each ruble of production costs spent.

Return on Assets: Is Capital Performing Well?

The next stage in assessing the profitability of an enterprise is the efficiency of assets. This indicator does not have a clear division into good or bad. A low return on assets indicates that capital is not working, and therefore, without generating profit, it may begin to gradually melt away. On the other hand, too high profitability is also not an unambiguously positive trend, since it is still advisable to keep part of the funds intact as a reserve (stabilization) fund. Determining this balance: what part of the assets to use and what part to keep for a rainy day is not an easy task and requires serious economic analysis.

To determine what kind of “return” one monetary unit of invested assets produces, let’s figure out how to calculate return on assets.

We determine the sales volume for the required period of time. To do this, we request from the accounting department data on shipments or payments for products, depending on the applicable accounting policy.
We calculate the cost of this product.
We calculate operating expenses, or fixed costs, for the specified period.
We calculate taxes due for payment to the budget.
We add up the amounts of tax payments, operating costs and production costs and subtract the resulting result from the sales volume of our products. Thus, we find out the net profit.
Using information from the financial statements, we determine the amount of total assets, which includes equity capital and the amount of liabilities, both to creditors (with a minus sign) and debtors to us (with a plus sign).
The last step is to divide item 5 by item 6 and get the cost of the company’s assets.

Sales profitability and its contribution to the overall efficiency of the enterprise

Let's say we found out that our capital and borrowed funds are working perfectly, production is on an efficient track, but the level of profitability of the enterprise leaves much to be desired. Perhaps it's because we're not doing well with sales. To find out if this is actually the case, you need to calculate your return on sales.

We determine the period for which we need to find out the profitability of sales of our products. This could be a month, quarter, year or other period of interest.
We consider the total revenue from sales of products - this is the sum of all income from the sale of goods and services for the specified period.
We find out net profit from accounting documents - this is the profit remaining on the balance sheet after taxation.
You can start calculating profitability. To do this, the amount of net profit must be divided by sales revenue.

Having obtained the return on sales ratio for a certain period, you can compare it with the indicator for any other time period. Such a comparison can clearly demonstrate what dynamics can be traced in sales effectiveness. Even growth in revenue and net profit in monetary terms does not mean that profitability dynamics are positive. It all depends on the relative indicator - the ratio of profit to revenue, which can show stagnation or decline.

A decrease in sales profitability is a reason to look for reasons and solutions to optimize the business. For example, you may need a more detailed analysis: profitability of sales over time for a specific product group or individual customers. Perhaps you need to reconsider the range of products offered and work on optimizing your customer base.

To be fair, it is worth noting that a decrease in sales profitability is not always the result of poor work by salespeople or marketers. This indicator can also be influenced by external factors that do not depend on the efficiency of the enterprise. The ability to take into account and predict such nuances is the key to the stable functioning of an organization.

Profitability threshold: how to calculate break-even

Financial analysis based on calculating the overall profitability of an enterprise and individual parts of the production process helps economists determine another important indicator. This is the profitability threshold, which shows the volume of production and sales of products that allows you to reach the break-even point. That is, when the organization’s total income completely covers its expenses.

The formula for calculating this indicator (Pr) looks like this:
Pr=Zp/Kvm,
Where:
Salary is a fixed cost;

Kvm is the gross margin ratio, which is calculated as “sales revenue” minus “variable costs”, divided by the amount of revenue.

If a company wants to have a stable profit, it must maintain sales volume above the profitability threshold while maintaining the same level of variable costs. A drop in sales volumes below this point, accordingly, leads to losses.