Yield is what?

Each economic activity has as its goal the production of profit (or positive profitability). And what is it from the economic point of view? The answer to this question will be considered in the framework of the article. In addition, it will be stipulated that such a rate of return and how to calculate it.

What is profitability?

By profitability in the economic sciences means a relative indicator that shows the effectiveness of investments in individual assets, projects, financial instruments or in the whole business. From a mathematical point of view, this indicator can be considered as a ratio of the total amount of money received to a certain base. And what is meant by it?

A base is understood as the sum of the initial investment or the amount of money that needed to be invested in order to receive a given amount of money. Therefore, the whole system of performance evaluation is also called the rate of return. Can this indicator be viewed from the negative side? Yes, the yield can be positive and negative. Under the first understand that the company returned the money spent and still left with a plus. Under the negative profit implies that the invested funds have not paid off and talk about net profit is not necessary.

Rate of return

This indicator is necessary for evaluating the effectiveness of the invested funds. The rate of return is the term that indicates the effectiveness of the investment. So, if the word "internal" is ahead, it means that the present value of the investment is zero, and all the funds received that go as profit from economic activity are equal to the costs when the business or project starts. With its help, you can determine the level of investment, which in any scenario will cost without loss to the owner of the money. Using the internal rate of return, the level of profitability of investments is shown, as well as the maximum amount that it makes sense to invest in this enterprise.

Yields

If you buy shares, then how to find out their past, then, how much did they bring profits to their owners a month or a year ago? Especially for this, there are special ratings of profitability. They select the best securities, which provide the greatest benefit in the short term. The profitability rating, in addition to the amounts of profit, may also contain indicators of value. And if the securities of an enterprise are quoted on exchanges for a long time - a year or decades, then one can assess the tendency of their development and it is better to approach the decision whether to acquire them or not. Profitability is a serious indicator, and it should be determined using the maximum amount of information.

Calculation

How to calculate the profitability? To do this, use the simple formula:

D = (SFAKP - SFANP) / SFANP.

These abbreviations are interpreted as follows:

1. D - profitability.
2. SFACC - the value of financial assets at the end of the period. It is necessary that it is investigated.
3. SFANP - the value of financial assets at the beginning of the period. It is necessary that it is investigated.

Values can be used and forecast values. So, you can know the value of the stock at the beginning of the year, see the expected value and decide whether to purchase the security or not. But to do something, having only predicted profitability, is a thankless task. It will not hurt to know about the state of affairs in the past.

When a rational investment strategy is compared, the profitability and risk always move in the same direction with changes, all other things being equal. So, the higher the profit received, the greater the risks exist.

For clarification, you can use an example: two people come to the bank. The first is a well-off citizen who has a stable and well-paid job, a house and asks for a loan from him. The loan is issued at 20% per annum. The second person is interrupted by casual earnings, abusing alcohol and has a number of other bad habits. He is given a loan at 40%. Further, the bank keeps all the obligations of people like man No. 2 in one portfolio of securities and sells with such a high level of profitability. But if you think: where can I earn more? With the second option, profitability is greater. With the first person, the yield is lower. But there is also less likelihood that he will refuse to pay you money. Therefore, when proposals for investment are considered, it should be remembered that profitability is not the only parameter that should be considered.

Conclusion

Therefore, in the end, we can conclude: the higher the yield, the greater the risk. Excessively high investment loss opportunities are not attractive to investors, so most people prefer to direct their money to something relatively safe and stable. Profitability is a mandatory parameter, because without it there is no sense in investing your money in something.