Profit before tax: economic sense and calculation methodology.

The economic activity of any enterprise needs to be assessed in order to get an accurate idea of how effectively the company is managed, what risks exist for it today and what are the prospects for its further development in the future. For this purpose, many economic indicators are analyzed , an important place among which is assigned to such as profit before taxation.

In order to understand what is the economic meaning of this indicator, it is necessary, first of all, to understand what it consists of. Profit before tax consists of sales profit, adjusted for the following indicators, acting as a kind of amendments:

- income or expenses related to the operating activities of the enterprise. This category includes income and expenses that occurred in the enterprise, however, not directly related to the sale of goods and services, that is, its main activity. These revenues and expenses may arise when certain assets are leased out, royalties for the use of intellectual property, dividends paid in case the company owns various securities, and so on.

- income or expenses, referred to as non-sales. These incomes and expenses arise in the event of a number of fines or penalties due to failure to fulfill the terms of contracts, payment of penalties, receipt of any funds free of charge (according to the gift agreement), as well as profits or losses of previous years, revealed by the accounting department only this year.

Thus, the profit before taxation is determined by the formula:
PDO = PP +/- OD / R +/- VD / R.

In this formula, the PDO is the indicator we are calculating, the ML / R is the operating income or expenditure, and VD / R is the income or expense classified as non-operating.

As you can see, profit before tax is an intermediate measure between the profit from sales and net profit. It should be understood that for economic analysis it is important not just the value of this indicator on the principle of "more is better", but the structure of this indicator plays an important role. Since pre-tax profit includes three main components, it is also important to determine the relationship between them. The higher the share of profit from sales and the lower the share of other components, the better and more efficiently the enterprise management system is built, and vice versa - the higher the share of casual incomes and expenses, the worse the mechanism of the firm's functioning is. The value of profit before taxation can be very high, however, if the share of the profit from sales in it is relatively small, it means that the firm exists only at the expense of casual incomes, the flow of which can stop at any moment. Thus, analyzing the structure of this indicator, we can draw conclusions about the quality of the functioning of the company's management system.

As you can see, profit before taxation is an important indicator of the company's economic state. His analysis can tell a lot about how the company develops, how effectively it is managed, and what are the further prospects for its development. This indicator is necessarily included in the financial statements of the enterprise and is shown in the statement of financial results, as well as in the statement of losses and profits of the company. Correct calculation of this figure will help to correctly inform counterparties and potential investors about how effective their investments will be, how reliable this investment object is and how much profit they can get in the future. Once the pre-tax profit is calculated, the amount of all taxes that the enterprise must pay is deducted from it, and thus the company's net profit is calculated - its main financial result.