How to determine the annual return on investments, stocks

From this article you will learn:

What types of profit are known in economics?
Why calculate the profit indicator
How to correctly calculate the net profit of an enterprise
How to calculate profit using a formula in Excel
What affects profitability?
How can you increase your company's profit?

Any entrepreneur must know the basics of financial analysis in order to correctly assess the effectiveness of his company's commercial activities. It is especially important to understand how and by what formula the profit of an enterprise is calculated, because this indicator is the tax base and also affects the size of dividends to founders and shareholders.

What is profit and how does it differ from income and revenue?

The financial condition of any enterprise can be objectively assessed by calculating economic indicators, which include profit. Its size allows us to draw conclusions about the effectiveness of the company’s current activities and prospects. A person who is well versed in business first of all judges the financial and economic condition of an organization precisely by how profitable it is.

According to the definition given by classical economic theory, profit is the difference between two indicators: the amount of funds spent by the enterprise on the sale of manufactured products and production costs. The term began to be used a couple of centuries ago, at a time when any enterprise had only two tasks: to produce goods and sell them.

Today, the economic activities of companies are more diverse. In addition to the main direction (product sales), modern business also has indirect sources of income (real estate rental, currency transactions, etc.), as well as a complex cost structure (logistics, marketing, advertising, obtaining a patent, etc.).

Depending on how much costs are taken into account in the calculation, profit can be of two types:

accounting - for the calculation, the amount of external costs is taken, that is, the costs of production and sale of goods, including the payment of wages, taxes, rent, etc.
economic (net) – the formula takes into account explicit and implicit costs (lost in exchange for explicit ones). That is, to calculate this indicator, you need to reduce accounting profit by the amount of implicit costs.

Revenue is the money that a company (or entrepreneur) receives from the sale of its goods or services. Simply put, this is the money that was earned from selling products.

A clear example of calculating the amount of revenue: a businessman sold 100 units. of their own goods, each worth 100 rubles. Revenue amounted to: 100 × 100 = 10 thousand rubles.

There are two types of revenue:

gross is the total cash receipts from the sale of goods (provision of services, performance of work);
net - the amount of money that remains after taxation (including VAT), loan payments, fines, etc.

Income is the difference between revenue and cost (purchase price) of manufactured and sold products. The cost includes tax payments, contributions to budgetary funds (for example, for social insurance), as well as material costs, that is, funds allocated for the purchase of raw materials, fuel, equipment, packaging, for auxiliary economic needs, etc.

An example of calculating the amount of income: a businessman produced products whose cost was 100 rubles per unit of goods. Having produced and sold 100 pieces at a price of 1,000 rubles/piece, he received an income in the amount of: 100 × (1,000 − 100) = 90,000 rubles.

Profit is the difference between total income (goods sold and other income) and expenses (production, sales, etc.).

Let's give a simplified visual example of the formula for calculating the profit of an enterprise: income from sales of products amounted to 100,000 rubles. Of this amount, 20,000 is the seller’s salary, and 13% after deducting wages is tax. Total amount: 100,000 − 20,000 − (100,000 − 20,000) × 13% = 69,600 rubles.

The main goal of any commercial enterprise or entrepreneur is to make the activity as profitable as possible, since it is this indicator that makes it clear how successfully the business is developing.

Profit includes the following elements:

Receipts from the sale of goods (provision of services, performance of work).
Funds that an organization receives from its auxiliary (non-core) activities. This category includes interest on deposits, rental of premises, etc.
The difference between the amount received from the sale of products and its cost.

Why do you need to know what the company’s profit is:

The indicator demonstrates the result of economic activity.
If the difference between income and expenses is positive, then the funds received can become investments necessary to expand the business.
The index is the basis for calculating the tax base.

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How to calculate profitability as a percentage per annum?

The formula for calculating simple profitability does not take into account such an important parameter as time. 25% can be obtained in a month, or in 5 years. How then can one correctly compare the returns of assets whose holding periods differ? To do this, calculate the yield as a percentage per annum . Yield as a percentage per annum is calculated in order to compare the performance of assets with different holding periods. Yield as a percentage per annum is profitability reduced to a single denominator - profitability for the year.

For example, a bank deposit gives 11% per year, and some shares brought 15% for 1.5 years of ownership, which was more profitable? At first glance, the shares, after all, brought more profitability. But the investor owned them for more than six months, so their profitability seemed to be extended over time compared to the deposit. Therefore, in order to correctly compare the deposit and shares, the return on shares must be recalculated as a percentage per annum.

To do this, add the coefficient 365/T to the formula, where T is the number of days of holding the asset.

An example of calculating profitability: We bought a share for 100 rubles, sold it after 1.5 years for 115 rubles. 1.5 years is 1.5*365=547 days.

(115-100)/100 ∗ 365/547 ∗ 100% = 10%. In this case, the deposit turned out to be slightly more profitable than the shares.

Like forex, management companies, brokers and banks manipulate annual returns.

In any advertisement of profitability, pay attention to the footnotes, clarify what profitability is indicated in the advertisement and for what period. For example, the advertisement says the yield is 48% per annum. But it can be received in just one month. That is, the company earned 4% in a month and now proudly advertises a product that gives 4*12=48% per annum. Even you, having earned 1% per day on the stock exchange, can boast that you earned 365% per annum) Only this profitability is virtual.

Enterprise profit structure

The profit of an enterprise includes various economic indicators that demonstrate the results of each area of the company’s economic activity.

The structure includes the following sources of cash receipts:

Sales of products (provision of services, performance of work).
Sale or management of real estate that is at the disposal of the enterprise.
Foreign exchange transactions, interest on stocks, bonds, etc.
Financial transactions (investments, dividends).

Who needs a net profit indicator and why?

First of all, let's understand the term. This concept is used to denote the part of the funds received that remain at the disposal of the enterprise after deducting from the total receipts from the sale of products, contributions to funds, taxes and other obligatory payments.

The net profit of an enterprise is an indicator, the calculation of which is required not only by the owner of the company, but also by other interested parties.

Founders and shareholders. This indicator is information on the basis of which the business owner evaluates the current economic activities of the enterprise and draws conclusions about the existing management system. In addition, this is the money that will be distributed among co-founders or private investors (shareholders).
Director. The responsibilities of a top manager include ensuring the financial stability of the organization. In order to make reasonable management decisions, he needs to analyze the current economic state, namely, assess the volume of available funds received and the profitability of the enterprise.
Counterparties. Organizations that supply raw materials must understand whether the customer will be able to pay for the goods. Therefore, it is also important for them to know how financially stable the company is, since unprofitable activities may become grounds for terminating the supply contract.
Investors. Companies and individuals who make deposits are interested in receiving the maximum amount of income. Therefore, it is important for them to understand what the company’s profit is, and therefore future income from investing in shares.
Creditors. A credit institution (bank), which temporarily makes funds available, must know whether the borrower will be able to repay the loan amount on time. Stable profit shows the solvency of the company, that is, the likelihood that loan payments will be sent on time.

Net profit is an index, the value of which most accurately characterizes the company’s economic activities. If in the current period this amount increases in comparison with the previous one, it means that the company’s activities are profitable. If it decreases, then this indicates irrational management tactics.

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Types of enterprise profit and their calculation

According to the current Russian legislation, the following profit indicators are used in accounting to determine the taxable base:

revenue;
gross;
proceeds from sales;
balance sheet;
clean.

Economic theory also describes contribution margin and operating profit.

Among all the indicators for calculating the profit of an enterprise, the key one is revenue from the sale of goods, since it reflects the volume of revenues from the main economic activities of the enterprise. Then the following indices are calculated: marginal, gross, sales revenue, operating, balance sheet and net profit.

General calculation formulas:

Revenue (TR – total revenue) = Unit price (P – price) × Quantity of goods sold (Q – quantity).

Margin (PM – profit margin) = Revenue (TR) − Variable costs (VC – variable cost).

Calculation of the gross profit of an enterprise (GP - gross profit) = Revenue (TR) - Technological cost of manufacturing goods (PC - production cost).

Proceeds from sales (PS – profit on sales) = Revenue (TR) − Cost (TC – total cost).

Calculation of the enterprise's balance sheet profit (BP - balance sheet profit) = Receipts from sales (PS) + Other income (OI - other income) − Other expenses (OE - other expenditure).

Operating (OP – operating profit) = Balance (BP) + interest payable (I – Interest).

Net (NP – net profit) = Balance Sheet (BP) − Taxes (T – taxes).

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Gross annual income

In accounting and finance, the terms income, revenue, and profit are often used interchangeably. If a company states annual income, it may imply that this amount constitutes gross income (revenue). Gross annual income is the income earned during a year from sales of a company's goods, services, capital, or other assets before expenses are deducted—that is, it is the total amount of money a business earned during the year.

Sales revenue is calculated by multiplying the price at which goods or services are sold in the market by the number of units sold. In addition to sales of products, revenue can come from other sources, including the sale of company shares, equipment, real estate, and also from money received after purchasing other businesses. Annual income also includes investment income (interest payments, dividends, capital gains, which is the change in the market price of an asset) and other income (for example, rent). Gross annual income can be calculated by the formula:

Gross annual income = Operating income or sales from the company's main activities + Non-operating income received from other sources

Gross annual income appears on the first line of the income statement (which is why it is also called the “top line”) of the income statement for the year. This indicator evaluates the financial condition and performance of the company in comparison with previous similar periods and the performance of competitors.

Calculation of net profit of an enterprise

The business owner, shareholders, counterparties - for all of them, the economic performance of the company and profit, in particular, are important. The dynamics of key indices show what amount is at the disposal of the enterprise after deducting taxes and other mandatory payments.

Free cash (remaining after taxes and settlements with counterparties and shareholders) is a fund that can be used to develop and expand the business. Do not forget that profit also affects how much dividends interested parties will receive.

The formulas used to calculate key economic indicators were discussed earlier. However, there is another method for calculating the profit of an enterprise, which is based on accounting data.

Alternative calculation formulas:

Addition of three types of profit - financial, gross, operating - and deduction of taxes.
The amount of revenue is reduced by the amount of cost, expenses for administrative, commercial and other needs and the amount of tax payments.
Tax payments are deducted from pre-tax profits.

These formulas are general. To get an accurate result, a corporate economist or accountant needs to adapt them to the company's activities, for example, adjust costs.

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Methods for calculating future profits

Let us demonstrate how the planned profit of an enterprise is calculated.

Direct counting method.

It is calculated as the volume of planned revenue reduced by the amount of the full cost (including contributions to funds).

Normative method.

Profit generation based on a system of various standards, for example, for assets.

Extrapolation method.

It is based on forecasting, that is, taking into account indicators of past periods.

Analytical method.

The influence of various factors on the expected profit margin is taken into account: product sales volume, cost, selling prices, etc.

The results of the presented methods for calculating the profit of an enterprise depend on the direction of the company’s activities, the chosen strategy, and various external and internal circumstances.

Only a thorough analysis allows you to plan performance indicators, look for ways to optimize costs and ways to make your business more profitable.

Having decided on the amount of available funds, the entrepreneur should decide what to spend it on. You can not only scale up an existing business project, but also direct them to production or social needs:

purchase new equipment to automate the technological process;
introduce new technologies;
make workers' working conditions safer;
pay bonuses to staff or increase payroll;
increase production capacity;
use money for investment or invest in transactions with securities and currencies.

From all of the above, we can conclude that the enterprise needs to plan profits, and this task can only be accomplished through accurate accounting of all cash receipts and costs. Obviously, in order to achieve the maximum amount of available funds, the first ones need to be increased, and the second ones need to be optimized.

Let's imagine that a certain company engaged in the production of clothing received a negative profit at the end of the year. After analyzing current activities, the top manager came to the conclusion that the number of sewing machines should be reduced (based on the size of the forecasted figures) or replaced with new ones in order to reduce maintenance costs, but the control indicator for the volume of goods produced should be increased. All funds remaining after paying taxes and other payments will be used to implement the approved plan.

How to correctly calculate portfolio return

Another calendar year is drawing to a close. The issue of assessing investment success becomes relevant. Calculating the return on a portfolio for a certain period is a simple task, but it has a number of features. Let's look at the main points that a private investor should know.

The income received from investments is usually measured as a percentage, since the absolute amount of profit directly depends on the size of the invested capital. To do this, the profit amount must be divided by the initial investment amount and multiplied by 100%. For example, if you invested 100 rubles. and earned 8 rubles from this investment, then the income will be 8/100*100% = 8%.

Let this 8% be earned by the investor in 10 months. Instead of an investment portfolio, the investor could place funds on deposit at a rate of 8% per annum for 1 year or invest in an alternative project that promised 15% for 18 months. Did the investor manage his money effectively?

In the financial sector, a single standard has been adopted that allows you to compare different investment options. According to this standard, profitability is assessed as a percentage per annum. To bring income for any period to the annual rate, you need to divide it by the investment period in days and multiply by 365 (or 366 if the year is a leap year).

In our example, 8% was earned in 10 months or 304 days. Then the profitability, expressed as a percentage per annum, will be 8%/304 * 365 = 9.6% per annum . The return on the deposit is already measured in percentage per annum and is 8%. The profitability of the alternative project will be equal to 15%/18 * 12 = 10% per annum. We conclude that on an annual basis, the investor’s portfolio is ahead of the deposit in terms of profitability, but lags behind the alternative project.

Note that this method of reducing profitability for an arbitrary period to an annual rate is simplified. To obtain more accurate results, you should use the following formula:

In the example under consideration, the return on the investor’s portfolio, calculated using the formula, will be: (1+8%) ^ (365/304) - 1 = 9,68%.

Average annual return and CAGR

If the investment period is several years, it is important for the investor to understand the average annual return on his investment. An investor can compare which asset options are most effective for his goals - investing in shares or other financial instruments, for example, bonds or deposits.

The easiest way is to calculate the arithmetic mean, that is, add up the returns for all years and divide by the number of years. If the spread of values is small, the result of such a calculation is close to the truth. But this approach is still not entirely correct and can mislead the investor.

By applying the average return to the entire investment period, we should obtain the same amount of capital as when using the original values. Let's check that this is not the case in the case of the arithmetic mean:

The final amount of capital using the average rate will be 1891.9 thousand rubles. against actual 1839.4 thousand rubles. This means that the arithmetic mean is not suitable for estimating the average rate of capital growth.

A correct assessment of the average annual profitability is carried out using the geometric mean formula. In Excel, you can refer to it by the name SRGEOM(), listing the return values for all years in parentheses. In this case, one must be added to each profitability, and one must be subtracted from the final result. Otherwise, the formula will generate an error.

For those who will calculate profitability without using Excel or want to better understand the logic of the geometric mean, here is a mathematical formula, where the letter r denotes the profitability for each year, and the letter n denotes the number of years:

If there is no data on profitability for each year, but the starting and final capital amounts are known, you can use the CAGR (Compound Annual Growth Rate) formula:

Return on a portfolio with a variable investment amount

The CAGR formula can be used in a situation where the investment amount was deposited once at the start, and the investor did not make any further movements on the account. In practice, this is a rare situation. Typically, an investor deposits or withdraws various amounts from an account during the investment process. In this case, a reasonable question arises: how to calculate profitability?

There are different approaches to calculating the amount of profitability in this situation, but the fastest and most accurate is to use a function in Excel called NETINDOH(). In the English version - XIRR().

The function takes two arrays as arguments: an array of cash flow values (deposits/withdrawals of funds) and an array of dates on which these flows were received (with a plus sign) or paid (with a minus sign).

Let's look at an example. Let’s say that on February 1, 2021, an investor invested 1 million rubles, then on June 1 contributed another 600 thousand rubles. and on September 1 of the same year withdrew 400 thousand rubles. As of November 1, the portfolio is worth 1.37 million rubles. Let's calculate the return on the investor's portfolio.

Enter the data into an Excel table. Deposits of funds are marked with a minus sign, withdrawals of funds and the final amount are marked with a plus sign. Next, we use the NETIROW() function as follows:

This function will give the result in percent per annum. To calculate the profitability for the investment period, the resulting number must be divided by 365 days and multiplied by the number of days in the period.

Thus, it turns out 18.7%/365*273 = 14%, which is exactly how much the investor earned in 9 months in relation to the average capital in the time period under consideration.

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Calculation of enterprise profit from financial statements

The accounting report on profits and losses (financial results of an enterprise) has the form of a table, where each line is assigned its own code. Therefore, key economic indicators can be calculated using a tabular method. To do this, all data is formed into a table, and the results are obtained by adding or subtracting the numbers indicated in specific cells.

Gross = Revenue – Cost.

Rows: 2100 = 2110 – 2120.

Receipts from sales = Revenue - Cost - Selling expenses - Administrative expenses.

Rows: 2200 = 2110 − 2120 − 2210 – 2220.

Balance sheet = Income from sales + Other income − Other expenses.

Rows: 2300 = 2200 + 2340 – 2350.

Operating = Balance sheet + Interest payable.

Rows: OP = 2300 + 2330.

Net profit = Balance sheet − Current income tax.

Rows: 2400 = 2300 – 2410.

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Calculation of enterprise profit using an example

Limited Liability Company "Cozy House", which is engaged in the production and sale of household goods, has the following financial statements at the end of two years (RUB):

Index	Code	2017	2018
Revenue	2110	130 000	70 000
Technological cost	2120	45 000	25 000
Business expenses	2210	6 000	4 000
Management costs	2220	18 000	13 000
Other income	2340	1 000	800
Other expenses	2350	2 000	3 000
Percentage to be paid	2330	6 000	4 000
Income tax	2410	12 000	5 960

Calculation of marginal profit: PM = TR − VC.

2018 = 70 000 − 25 000 = 45 000.

2017 = 130 000 − 45 000 = 85 000.

Calculation of gross profit: GP = TR − PC.

2018 = 70 000 − 25 000 = 45 000.

2017 = 130 000 − 45 000 = 85 000.

Calculation of profit from sales: PS = TR − TC.

2018 = 70 000 − (25 000 + 4 000 + 13 000) = 28 000.

2017 = 130 000 − (45 000 + 6 000 + 18 000) = 61 000.

Calculation of book profit: BP = PS − OI − OE.

2018 = 28 000 − 3 000 + 800 = 25 800.

2017 = 61 000 − 2 000 + 1 000 = 60 000.

Calculation of operating profit: OP = BP + I.

2018 = 25 800 + 4 000 = 29 800.

2017 = 60 000 + 6 000 = 66 000.

Calculation of net profit: NP = BP − T.

2018 = 29 800 − 29 800 × 0,2 = 23 840.

2017 = 60 000 − 60 000 × 0,2 = 48 000.

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Management cost accounting

The main tasks that cost accounting is designed to solve for management purposes:

Managing costs and expenses and through them the possible amount of profit. To do this, accounting expenses can be structured into:

direct and indirect;
main and invoices;
production and non-production;
single-element and complex.

Planning and strategic decision making. This task requires ensuring management accounting of expenses in analytics:

constancy or variability of expenses (see example below);
divisions into accepted and imputed;
divisions into planned and unplanned;
assessed by growth or limits.

Ensuring control and regulation of expenses. In accordance with this, management accounting can be classified according to:

the principle of adjustability (are management decisions capable of influencing the size and occurrence of a specific expense);
the principle of efficiency (are management decisions capable of influencing the effect of the expenditure made);
standardization (establishment of cost standards and analysis of actual deviations);
controllability (is it possible to establish control and preventive procedures for this type of expense).

IMPORTANT! The expected main result of the cost management process is an increase in profit margin.

That's why:

structuring of income and expenses should be carried out in conjunction;
the classification adopted for accounting should provide the ability to identify, first of all, exactly those components of expenses that can be managed through decision-making.

Example (continued)

The manager compiled a comparative table for the store in Moscow Region based on the data he had:

Data on management accounting analysts	Own store	Rent
Income per month (based on similar properties)	1 500 000	150 000
Fixed expenses
Cost of goods (which will provide the planned amount of revenue)	1 000 000
Salary expenses for salespeople (including mandatory contributions)	195 000
Costs for delivery of goods from the central warehouse	90 000
KKM service	6 000
Communal payments	25 000
Variable expenses
Repair and maintenance of working equipment	20 000
Expenses for maintaining the premises	15 000
Expenses for management salaries (in distribution) - accounting, logistics, control	30 000	10 000
Taxes (OSN)	23 800	28 000
Projected profit per month	95 200	112 000

Thus, taking into account variable costs according to management data, it is more profitable for a company to rent out premises in the Moscow Region than to open another store there.

The ability to justify a decision is ensured by management accounting of income and expenses in the necessary analytics.

more about the method of maintaining management accounting using MS Office in the material “Management accounting in an enterprise - examples of Excel tables”

Table for calculating enterprise profit in Excel

Often businessmen have to independently calculate key economic indicators. To ensure accurate results, the process can be automated using special programs. Below is an example of calculating enterprise profit in an Excel table.

The table is divided into 4 blocks:

Tax rates (profit, VAT) – cells B1:B2.
Sales volume, costs and value added tax - cells B4:B6.
Calculation of the VAT amount - cells B8:B9.
Gross, net profit and calculation of corporate income tax - cells B11:B14.

The first two blocks are used to enter existing ready-made data; in the other two, the result is calculated automatically based on the entered formulas.

Excel formulas that can be used to calculate the amount of profit of an enterprise:

Formula for calculating the amount of tax liability:

=ROUND(B4*(B1/(1+B1));2) – the result obtained is rounded to the second digit.

Formula for calculating VAT payable to the budget:

=B8-B6.

Formula for calculating gross profit excluding VAT:

=B4-B8.

Formula for calculating the amount of gross profit:

=B11-B5.

Formula for calculating corporate income tax:

=ROUND(B12*B2;2) – the result obtained is rounded to the second digit.

Formula for calculating net profit:

=B12-B13.

The presented table can be adjusted to suit the characteristics of your enterprise, and it will become a useful working tool. Such programs are universal, regardless of external factors. So, if changes occur in tax legislation, then the calculation formula can simply be adjusted, let’s say replacing the base coefficient. If you change numbers, for example, sales revenue or costs, the results will be displayed in the corresponding cells.

A spreadsheet makes it possible to check your assumptions, evaluate how justified new investments or technologies will be, etc. Not a single large company can do without modern automation programs, such as Excel, since they are required for accounting, and for maintaining statistics, and for forecasting.

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An example of calculating profit in 1C: Holding Management

In the example considered, the amount of income from the sale of the Megapolis shopping center amounted to 573,750 rubles. (column 2. “Calculation certificates”, section “Tax base”).

The organization's expenses amounted to 483,500 rubles. (column 3. “Calculation certificates”, section “Tax base”).

Profit of TC "Megapolis" - 90,250 rubles. (column 4 “Calculation certificates”, section “Tax base”)

Amount of income tax (20%) gr. 3. “Calculation certificates”, section “Income Tax” – 18,051 rubles. (90,250 RUR * 20%).

Net profit of TC Megapolis – 72,199 rubles. (90,250 rubles – 18,050 rubles).

How to determine and view net profit in 1C: Holding Management? What transactions are involved in the formation of the financial result? Hints on these questions can be obtained by clicking on the hyperlink “Closing accounts 90, 91” and “Balance sheet reformation” by clicking on the “Show transactions” command.

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The document “Closing accounts 90, 91” reflects the amount of profit (loss) from sales on account 99.01.1.

Fig. 14 Postings for closing the account. 90, 91

During the reformation of accounts, net profit for distribution has already been determined and allocated to subaccount 84.01.

Fig. 15 Accounting entries for “Balance Sheet Reformation”

Using the standard report “Turnover Balance Sheet” (SBL) from the “Reports” section, you can also view the turnover of accounts to determine net profit and its value.

Fig. 16 OSV in 1C:UH

Subaccounts of account 90 “Sales” collect and reflect data on the amount of revenue from sales, cost, and taxes.

Fig. 17 SALT according to account 90 in 1C:UH

And after the balance sheet reformation, the month-closing data discussed above will be reflected in account 99 “Profits and losses”.

Fig. 18 SALT according to account 99 in 1C:UH

The undistributed net profit of TC Megapolis is reflected in account 84.01 “Profit subject to distribution”.

Fig. 19 SALT according to Account 84.01

This data is used to generate the “Income Tax Return” report.

Free audit and recommendations for accounting for net profit based on 1C

Let's go to the "Regulated reporting" section and create the above report - the "Create" button.

Fig.20 1C-Reporting in 1C:UH

Having selected the report, we will set its settings - we will indicate the organization for which to display data, and we will set the reporting period. Click “Create”.

Fig.21 Creating a report in 1C:UH

Let's fill out the report using the "Fill" button. Let's move on to "Sheet 02". The table shows the indicators for calculating profit and the amount of calculated tax.

Fig. 22 Declaration form in 1C:UH

By right-clicking on a cell and selecting "Decrypt", the user can get the details of the specified cell. For example, the detail of cell 060 is “Profit (Loss)”.

Fig. 23 Detail of the “Profit (loss)” cell in the report

Analysis of profit and profitability of the enterprise

The goal of any commercial enterprise is to ensure that the activity is as profitable as possible, that is, all existing costs (for raw materials, labor resources, marketing and advertising, etc.) are repaid. Despite the fact that the company’s position is influenced by market conditions (presence of competitors, market factors), the financial condition must be regularly assessed to determine whether the costs incurred are bringing the expected results. You can draw conclusions about how profitable and successful a business is by considering two indicators, which include profit and profitability.

You can analyze the profit of an enterprise using various techniques.

The following types of analysis exist:

structural,
factorial,
temporal,
comparative,
index.

Using structural analysis (analysis of the constituent elements in the profit structure), an entrepreneur can determine what share of total income is occupied by funds, the sources of which are both the main and non-core activities.

The amount of income can be calculated as follows:

Percentage of operating activities = Sales profit / Profit before tax.

Percentage from other operations = Profit from other operations / Profit before tax.

Changes in the profit structure allow us to draw conclusions about how profitable the operating activities are. If a company receives more free cash from auxiliary operations, then the existing business model is ineffective.

The factor analysis technique involves research showing how profit depends on the influence of various factors:

cost of production per unit of production;
the size of the wage fund;
sales volume;
selling price of the goods.

This method allows you to find relationships between different values of one variable. For example, find out how the gross profit of an enterprise will increase if revenue increases by 1 ruble, that is, understand how the increased sales volume will affect the final result.

You can also analyze profits from the point of view of analyzing changes in dynamics, that is, by comparing indicators in the current and past periods. For example, to track how the size of the company’s revenue has changed: to calculate it, you need to divide the revenue received in 2021 by the corresponding index for 2021. We can talk about growth if the resulting result is greater than one.

The essence of comparative analysis is that the key indicators of the economic activity of an enterprise are compared with similar values of competing firms.

Index analysis of the level of profitability gives an idea of how profitable the company's activities are. This technique also involves comparing the indicators of the planned and past periods, which allows us to draw conclusions about increasing business efficiency or stagnation. Profitability shows how much profit the company receives from each ruble spent.

Calculation of profit and profitability of an enterprise:

Total profitability ratio = Book profit / Revenue × 100%.
Gross Margin Ratio = Gross Profit / Revenue × 100%.

A similar calculation shows how profitable assets or capital are.

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Factors affecting profit

Profit is influenced by various factors, which can be divided into internal and external.

Internal factors include management decisions and the policies of the enterprise itself:

quality of manufactured goods;
optimization of production costs;
automation of technological processes;
efficiency of sales policy;
expansion of product range;
marketing strategy.

Any enterprise is also influenced by external factors that cannot be influenced:

location;
state of ecology in the area;
climate features;
state policy regarding entrepreneurship support;
economic and political situation in the region (city, region, country);
provision of resources.