Profitability of the Capital

Profitability is an indicator relative. It characterizes the level of profitability of the enterprise. This indicator reflects the efficiency of the business in general, shows the profitability of certain areas of activity. Profitability indicators are used in financial analysis, as they are able to more fully than profit, characterize and reflect the real results of economic activity. Their value demonstrates the ratio of the result of activity to the consumed resources.

Financial analysis provides a true picture, reflecting the efficiency of the company, its solvency, profitability, development prospects. The data of such analysis allow to rely on specific figures when making strategic decisions for future periods.

Profitability indicators are very rich. All of them are characterized by the efficiency of the enterprise from different positions. These indicators can be grouped into three large groups in separate areas. They include product profitability, profitability of sales and return on equity.

Return on equity Or the return on capital reflects the ratio of the book profit or partial profit to the average value of the total capital invested in the enterprise or its individual parts. Capital can be own, stock, borrowed, permanent, negotiable, basic, operational, etc.

The profitability of the capital of a bank or an enterprise is a financial indicator that characterizes profitability in the context of the assets at their disposal, with the help of which they make a profit. When analyzing these indicators, all assets held by the enterprise are taken into account. The total return on capital is calculated as follows.

To calculate the return on capital, you need to determine the volume of sales for a certain period. The information can be considered both on shipment, and on the payment received for the shipped production. Companies in this issue proceed from the convenience of the method of determining the volume of sales.

Then you need to determine the cost price of the products sold. This is done by one of the ways that is characteristic of determining the volume of sales. In addition, it is necessary to determine the operating costs (fixed costs) for the same period. The amount of taxes that will be paid for a given period is calculated.

After that, the net profit is calculated. For this, the cost of production, operating expenses and taxes are deducted from sales. All indicators in the calculations should be carried out to one unit of measurement (for example, thousands of rubles).

At this stage, you can begin to determine the total assets. Aggregate assets are the sum of the total liabilities of the enterprise and its own capital. Now you can calculate the return on capital. To do this, the net profit must be divided into total assets.

If the enterprise operates different financial indicators in its activity, the profitability of capital can be calculated in another way. For this, the profitability of sales is multiplied by the turnover of total capital.

For the owners of the company, the most important indicator is the return on equity. It is the main criterion for the effectiveness of the use of the funds invested by them. This indicator is calculated as the ratio of net profit to equity on the balance sheet.

Analysis of profitability allows you to reflect the quality of the financial condition of the company and see its prospects for the future. Therefore, in the analysis, special attention is paid to the quality of the indicators and their correct grouping by enlarged groups.