Total profitability: calculation formula

2024 Author: Howard Calhoun | [email protected]. Last modified: 2023-12-17 10:16

To analyze the performance of an enterprise, economists and accountants use quite a lot of different indicators. Among them, there are those that illustrate the overall results of the company's economic activity, others affect narrower areas. Often, to form an opinion about the success of an organization, it is enough to study its overall level of profitability. The formula, as well as its components and the meaning of numerical indicators will be discussed in this article.

How is profitability calculated?

The main goal of every entrepreneur, manager or leader is to achieve the highest possible results in the implementation of production, trade, consulting or other activities. Profit can be safely considered evidence of success. This indicator is calculated by subtracting the expenses incurred by the enterprise from the total income (or the amount of revenue).

The main indicator, which in percentage termsshows the degree of efficiency in the use of resources available to the enterprise (material, labor, financial), is the overall profitability. The formula for its calculation is extremely simple. This is the ratio of the received net profit (NP) to the average annual cost of fixed assets of production (PF) and normalized working capital (NOS): RR=NP / (OF + NOS)x100%.

In other words, this indicator reflects the actual increase in capital invested in economic activity. It is equal to the ratio of profit to assets.

Profitable and unprofitable enterprise?

When the total profitability (the formula allows you to calculate the relative indicator, which is always higher than zero) is greater than one, it means that the profit exceeds the costs. The company is profitable. It brings in income. Otherwise, the company is called unprofitable. A negative indicator can only be indicated conditionally, if we take into account the concept of negative profit (loss).

Factors that determine profit and profitability

The amount of profit and, accordingly, the level of profitability is influenced by numerous factors. They are external and internal. The first group includes those that do not depend in any way on the efforts made by the staff. This category includes the dynamics of the cost of materials, changes in product prices and depreciation rates, and an increase in transport tariffs. For the analysis of economic activity, these nuances are extremely important. They affect the value of summary indicators throughout the enterprise.

Sales volume, cost and overall profitability (the formula of which is given above) inevitably depend on whether there are changes in the structure of the product range. As for internal factors, they reflect the level of labor investment of the company's employees, as well as how efficiently and competently the management manages production resources.

Universality of the indicator

The overall profitability ratio, the formula of which is the same for all business entities, is becoming a universal indicator. Given that it is relative, and not absolute (like profit, for example), it can be used to compare the performance of several completely different enterprises. Let's talk about them in more detail.

Absolute indicators (revenues, sales volumes) do not allow for a correct comparison, since the result will not be reliable. It is quite possible that the efficiency and sustainability of an organization with a small sales volume will be higher than that of a corporate giant. In terms of its value, the overall profitability of the enterprise (the formula allows you to calculate the relative indicator) is equated to the efficiency factor (COP). But that's not all. In addition to the general indicator, they also calculate the return on capital, production, sales, personnel, investments, etc.

Generalprofitability: balance sheet formula

Most types of profitability are calculated based on balance sheet data. This accounting document contains information about all key categories: assets, liabilities, equity of the organization. The form is produced twice a year, which allows economists to analyze data at the beginning and end of the period. Separate types of profitability are calculated taking into account the following indicators:

• Assets (current and non-current).
• Equity values.
• Volume of investment and others.

However, it is extremely wrong to calculate based on only one of the values. Correct analysis implies the use of average indicators. To obtain them, an arithmetic mean is found: from the indicator at the beginning and end of the current period. The numerator of the formula is net profit. And in the denominator - the indicator, the profitability of which is required to be calculated. But that's not all. The overall profitability (the formula will contain the figures indicated in the balance sheet) is calculated after the document is drawn up.

What does the concept of "return on equity" mean?

The equity of an enterprise is the financial expression of the founders' claims to the company. Both for them and for investors, indicators characterizing the capital of the company are extremely important. Pay attention to the calculation of the overall profitability. The formula allows you to get a generalized concept of the state of the organization, its effectiveness. Based on the receivedThese investors make decisions that are sometimes vital for the enterprise. Having a direct interest in its success and development, they invest their own or borrowed funds and expect to share future profits with the owner.

How is the overall return on equity determined? The calculation formula is as follows: the ratio of net profit (NP) calculated for a certain period to the average annual value of the cost of equity (IC): RR=(NP / IC)x100%.

The data obtained as a result of calculations are compared with those of previous periods. Economists also use these numbers to compare the performance of an enterprise with other companies in a particular industry. By observing an increase in the overall return on capital, they conclude that financial resources are being used correctly. Obvious success in conducting business and economic activities attracts the attention of investors. And opens the way for the business owner to further develop their business.