To understand the success of the enterprise, one of the main criteria is the amount of profit. In general terms, under the profit understand the difference between the cash received from sales, and the costs of the enterprise. There is the concept of a rate of return, the calculation formula and the economic essence of which we consider below.
Concept of profit margin
In the Decree of the Government of the Russian Federation of June 25, 2003 No. 367 “On the Approval of the Rules for Conducting by the Arbitration Manager of the Financial Analysis”, the net profit rate is defined as the ratio of the amount of net profit to the amount of revenue excluding value added tax and excise taxes included in the price of sales of goods or services of an enterprise .
The profit rate shows how many kopecks of profit are accounted for each ruble of revenue. This indicator allows you to evaluate how effective is the ratio of enterprise costs and proceeds from sales.
Profit Rate Formula
Profit rate = Net profit / Revenue
The numerator is the net profit indicator, which is the final indicator of the company's profitability, cleaned from all possible costs.
On the lines of form 2 “Profit and loss statement” the formula is calculated as:
Net profit = Profit (loss) before tax - Current income tax - Change in deferred tax liabilities - Change in deferred tax assets - Other
The denominator is the revenue indicator, which reflects the amount of revenue received by the enterprise from the sale of goods and services in this reporting period, net of value added tax and excise taxes. In form 2 “Profit and loss statement” this indicator is reflected in line 2110 “Revenue”.
Application rate of return
The rate of profit is applied by company management for:
- tracking the dynamics of business profitability, when the indicator is compared with previous periods,
- comparing the performance of branches, divisions or subsidiaries of the company for the purpose of analyzing the effectiveness of an asset and the subsequent decision to transform the structure of the asset portfolio,
- benchmark with other enterprises of the industry, if the average rate of return for similar companies is known, which allows you to maintain or achieve competitive advantages in price at low costs,
- the expected rate of return is used to decide whether to start or abandon the investment project or when choosing from several investment projects when investment with the highest rate of return is preferred.
Factors Affecting Profit Rate
The rate of profit is formed by the ratio of two indicators of profitability, respectively, factors affecting the numerator and denominator also affect the final value.
The numerator, revenue, depends on the sales volume in physical units and on the selling price of goods or services of the company. At the same time, the pricing policy of the company, the established rules for payments - with deferrals, advance payments, and so on - have an impact on sales.
Net profit depends both on the price and volume of sales, and on all costs incurred by the company in the course of business, both production and related to other supporting processes in the company.
Thus, a company can sell large volumes of products at reasonable prices, but if the prime cost is very high and other costs are also higher than their acceptable level, then the whole effect of large sales will be offset by inefficient production and management processes.
What is the profitability of the enterprise
Profitability (RO - returnon) - a general indicator of the economic efficiency of the enterprise or the use of capital / resources (material, financial, etc.). This indicator is necessary for the analysis of economic activity and for comparison with other enterprises.
Profitability, in contrast to profit, is a relative indicator, so the profitability of several enterprises can be compared with each other.
Profit, revenue and sales are absolute indicators or economic effect and it is incorrect to compare these data of several enterprises, because such a comparison will not show the true state of affairs.
Perhaps a company with less sales will be more efficient and sustainable, that is, it will bypass another company in relative terms, which is more important. Profitability is also compared with efficiency (coefficient of performance).
In general terms, profitability shows how many rubles (kopecks) of profit will bring one ruble invested in assets or resources. For sales profitability, the formula is read as follows: how many kopecks of profit are contained in one ruble of revenue. Measured as a percentage, this indicator reflects the effectiveness of the activity.
There are several main types of profitability:
- profitability of products / sales (ROTR / ROS - totalrevenue / sale),
- return on cost (ROTC - total cost),
- return on assets (ROA - assets)
- return on investment (ROI - invested capital)
- personnel profitability (ROL - labor)
The universal formula for calculating profitability is as follows:
RO = (Type of profit / Indicator whose profitability must be calculated) * 100%
In the numerator, the type of profit - most often used is the profit from sales (from sales) and net profit, but it is possible to calculate based on gross profit, retained earnings and operating profit. All types of profit can be found in the statement of financial performance (profit and loss).
The denominator is the indicator whose profitability must be calculated. The indicator is always in value terms. For example, find the return on sales (ROTR), that is, the denominator should be the indicator of sales in value terms - this is revenue (TR - totalrevenue). Revenue is found as the product of the price (P - price) and sales (Q - quantity). TR = P * Q.
In addition, we offer to read how to calculate the breakeven point, which is also called the threshold of profitability.
And this article will be interesting for those who have a ready-made business plan with a profitability calculation and who need support from the state.
An example of calculating the profitability of production
To calculate the profitability of production, the following indicators are needed: total cost (TC) and profit from sales (PR). The data are presented in the table.
|Indicator||Enterprise 1||Enterprise 2|
|Revenue (TR)||1 500 000||2 400 000|
|Total Cost (TC)||500 000||1 200 000|
Profit from sales can be calculated as the difference between revenue and total cost.
ETC1= TR-TC = 1500000-500000 = 1 000 000 rubles
ETC2= TR-TC = 2400000-1200000 = 1 200 000 rubles
Obviously, the revenue and profit from sales of the second enterprise is higher. In measuring absolute indicators, the effect of the second enterprise is higher. But does this mean that the second enterprise is more efficient? To answer this question, it is necessary to calculate the profitability of production.
The profitability of production of the first enterprise is 2 times higher than the profitability of production of the second enterprise. We can confidently say that the production of the first enterprise is 2 times more efficient than that of the second.
Profitability, as an indicator of the effectiveness of an enterprise, more accurately reflects the real state of affairs in production, in the sales or investments of an enterprise, allowing it to react correctly to the current situation, as opposed to using absolute indicators that do not give a complete picture.
EBITDA and its balance sheet formula are described here.
Video showing profitability:
Net profit margin: meaning
Net profit margin (or net profit margin) is the ratio of net profit to revenue measured as a percentage (Decree of the Government of the Russian Federation of June 25, 2003 No. 367). That is, this indicator shows how much profit falls on the unit (ruble) of revenue. Accordingly, it serves as a characteristic of the profitability (effectiveness) of the activity.
It should be distinguished from other indicators. profit margins (profitability) calculated from other bases, for example, from:
Next, for brevity, we will call the rate of net profit rate of return, and other indicators profit margins - indicators of profitability.
Rate of return makes it possible to evaluate the profitability of a business that takes place after all expenses associated with it and the deduction of taxes due are paid. A good value is the value of this indicator in the range from 8 to 20%. The higher it is, the higher the profitability and efficiency of a business.
Real values profit margins to a large extent depend on the industry in which the activity is carried out, and the specific working conditions of a particular legal entity. If there is a loss or zero profit, this indicator is not calculated.
Profit Rate: Application
Rate of return can be used not only to estimate the amount of income received from each ruble of revenue, but also for other purposes, such as:
- Regulation of sales prices.
- Making predictive calculations.
- Assessment of the effectiveness of investment in business. Moreover, the definitions of one profit margins it will not be enough for this. It will take calculations of a number of other ratios, primarily indicators of return on investment, capital, assets and costs. Rate of return - only one of the values determined by such an assessment. But with its expected value will be compared, for example, interest rates on investment loans and borrowings. And if these rates are higher than rate of return, such investments will be unprofitable.
- Determining the feasibility of providing a legal entity with a loan or loan to replenish working capital. If these revenues are entirely directed directly to investments in the cost of production or the purchase of goods for resale, then while maintaining sales prices rate of return will show whether the person will be able to pay interest for providing him these funds. If a rate of return higher than the interest rate, the probability of a return on borrowed funds and interest on it is high. If the opposite is true, then a refund may not be possible.
- Assessment of investment attractiveness, a number of indicators for which, including the value profit marginscalculated over several years. Sustainable growth is a good feature. profit margins.
In this way, rate of return of interest:
- for owners
- banks and lenders,
- management and financial and economic services of the legal entity itself.
It is also useful for listed persons to know the magnitude of the liquidity ratios characterizing the subject. Read about them in the article."The analysis of liquidity ratios (nuances)".
Calculation of indicators of the formula
The financial results report includes indicators included in profit margin formula, come from accounting data.
The revenue shown on line 2110 corresponds to the amount formed on the credit of account 90, after deduction of taxes (VAT and excise taxes) in the debit of the same account.
The net profit can be taken as the balance of the account 99 before the reformation of the balance sheet. In the report on financial results, it is sequentially calculated from revenue (line 2110) by performing arithmetic operations with this amount with the participation of data that fell into each subsequent line of this report from certain accounting accounts:
- In line 2120 - as shown on the debit of the account 90 digits received from accounts 20, 23, 41, 43.
- On line 2210 - as shown on the debit of account 90 digits received from account 44.
- On line 2220 - as shown on the debit of the account 90 digits received from account 26.
- In lines 2310, 2320, 2340 - as equal to the income shown on the credit of account 91, net of VAT, if these income contain it.
- In lines 2330 and 2350 - as equal to the expenses shown on the debit of account 91, minus the amounts of VAT related to income reflected on the debit of account 91.
- Line 2300 - as equal to the amount debited from accounts 90 and 91 to account 99.
- To line 2410 - as equal to the amount of income tax accrued on the declaration and shown in the accruals on the credit of account 68.
- On line 2421 - as equal to the difference between PNO and PNA, which got to account 99 from account 68.
- To line 2430 - as equal to the difference between the credit and debit turnover of IT on account 77 (a positive value with a predominance of credit turnover and a negative value with a predominance of debit).
- To line 2450 - as equal to the difference between the debit and credit turnover of IT on account 09 (a positive value with a predominance of debit turnover and a negative value with a predominance of credit).
- To line 2460 - as equal to the sum of other data (except the above) present on account 99.
All values in the report on financial results are reflected taking into account the sign: positive in their absolute values, and negative in parentheses. Thus, in order to get the final result in the form of the value of net profit, you need to sum the values of all the listed lines, taking into account the sign that is indicated for them.
In the simplified form of the report, the definition of net profit will be similar and through the names of the lines will have the following form:
Revenue + ordinary expenses (with the - sign) + interest payable (with the - sign) + other income + other expenses (with the - sign) + income tax (with the - sign).
When using the old form of the report on financial results (profit and loss statement approved by order No. 67n), the indicated line numbers of the current report will be replaced as follows:
- 2110 to 010,
- 2120 to 020,
- 2210 by 030,
- 2220 to 040,
- 2310, 2320, 2340 at 080, 060, 090,
- 2330 and 2350 at 070 and 100,
- 2410 by 150,
- 2421 to 200,
- 2430 by 142,
- 2450 to 141,
- 2460 to the line number additionally entered into the old report form.
Net profit margin is an indicator important enough to assess the investment opportunities of a business entity and the prospects for regulating sales prices. Its calculation is simple, but depends on the quality of the data involved in the calculation procedure.
Business Performance Factors
Frequent use of significant sources of increasing business efficiency involves the use of a set of measures that reflect the main directions of development and improvement of activities.
It should be noted the most important classification of factors of business efficiency, based on determining the level of production management. These are internal and external factors, since they significantly affect the degree of effectiveness of entrepreneurial activity.
In more detail, we highlight three fundamental factors that directly affect the conduct of business and its economic result:
- Equipment, the so-called means of production. With high performance, quality service and optimal workload, you can get the maximum result with minimal cost.
- Raw materials, materials and similar components. Good quality, minimal waste and low energy consumption, together with good inventory management, should guarantee a high level of production, low rejects and minimal costs.
- Business Technology good sign of production intensity.
Use Initial Attachment as Denominator
To determine the estimated rate of return should first determine the annual profit, which is found by the formula:
P = BB-OI
where P is the profit of the organization
BB - gross revenue
OI - total costs
Then you should determine the cost of depreciation of fixed assets using data on the value of fixed assets.
This is done in two steps:
OS = NS - LS
SI = OS / SPI
SPI - useful life
Next, it is necessary to determine the average annual profit, for this we subtract the depreciation cost from the annual revenue:
Ps = B - SI
In - revenue
Determine the estimated rate of return by a simple ratio:
RNP = Ps / PV
Calculate the average profit of the company.
The method under consideration is based on the standard formula:
SNP = Ps / SV
Determine the average investment.
This indicator includes capital investment costs and is found by the formula:
CB = (HB + LS) / 2
Profit rate calculation:
RNP = PS / SV * 100
The ratio of the net cost savings to the initial investment, presented as a percentage, is RNP.
It is easy enough to determine SORT; all data can be obtained in accounting reports.
How to calculate profitability?
Calculate several types of profitability: sales, products, assets, capital, and so on, for which there is a specific calculation procedure. Profitability ratios are often used in financial analysis, in forecasting.
Existing methods for determining profitability pursue their goals and use various reporting indicators.
Return on equity
Profit is not a sign of effective activity. It is necessary to calculate in more detail other financial indicators.
Rock = Net Income / Fixed Capital
The coefficient reflects what share of net profit falls on the unit of fixed capital of the company.
Calculation of return on sales
The coefficient characterizing net profit in gross revenue shows финансовую эффективность деятельности. За финансовый результат можно принимать разные показатели прибыли.
Нормативное значение рентабельности продаж зависит от ряда особенностей, например, отраслевой принадлежности.
The profitability threshold is also called the breakeven point, which characterizes such a level of business activity at which the sum of costs is equal to the sum of income and helps to calculate the stock of financial strength of the company:
Pr = Pos costs / K gross margin
The gross margin ratio is found by the formula:
Vm = (Gross revenue - Variable costs) / Gross revenue
When planning and forecasting, many managers take this as the basis for decision-making when it is necessary to conduct business in such a way that this threshold is not exceeded.
It shows how much money spent on business is paid back, it reflects how much profit is made per one invested ruble. It is used to analyze cost-effectiveness.
The indicator is defined as follows:
Рз = Profit / De-capitalized expenses.
Additives are used when the indicator is calculated as the difference or the sum of the resulting factors, multiplicative - as their product, and multiple - when the factors are divided into each other to obtain the result.
The use of these models leads to combined or mixed models. For a full factorial analysis of profitability, multifactor models are used, which include different profitability ratios.
Net profit is a rather difficult economic category. The best minds of our time are engaged in its study, both domestic and foreign.
The company's management has a high responsibility for managing the company so that the business generates maximum profit. Because owners always want to receive dividends.
Thus, the management faces an important task of managing income and expenses in such a way that there are more of the former, and the latter as little as possible. Given that the calculation of net profit takes into account all direct, variable and indirect costs
Under the net profit of the economic part should be understood the share of gross revenue, minus the cost of paying salaries and tax payments.
Making a profit is the main goal of a commercial organization.
Profit generation is a rather complicated process, only a few owners have the necessary skills and the ability to make the right management decisions.
Theoretically, profit is a component of the balance sheet profit of the company, remaining at the disposal of the owners, which can then be distributed at their discretion. Net profit indicators are incredibly important for each enterprise, because investors are more oriented on them.
Net profit distribution
The main legislative framework governing the distribution of net profit is the Federal Law "On Limited Liability Companies".
The organization can distribute profits on a quarterly basis, once every six months or annually. The decision is made at the general meeting of participants. Net profit, as we found out, is the financial result of the company.
Business owners can distribute it for the following purposes:
- dividend payment
- business financing in the form of investments in fixed or working capital
- reserve capital and further
In addition, joint stock companies issuing shares and trading them on the stock exchange are interested in paying dividends, as this is the main indicator that investors are guided by when investing their capital.
Experienced owners understand when to make a profit and when to invest. As long as the business has room to grow and develop, it will be inappropriate to withdraw capital when it can be advanced.
Therefore, the study of the market, competitors and development prospects gives certain data on the stages of activity and the possible achievement of maximum production volumes.
At this moment, the company will not be able to actively and dynamically develop, but will enter a phase of stagnation and then net profit should be withdrawn in the form of dividends.
Net profit generation
The net profit of the reporting period does not provide complete information, due to the fact that not all income and expenses are taken into account. In turn, this reporting line characterizes the activity quite revealingly.
Net profit is main indicator characterizing the activities of an economic entity. This indicator interests lenders in order to study creditworthiness, counterparties to determine trustworthiness and shareholders to calculate performance.