The profitability of the main activity is an indicator of how appropriate, in principle, is the functioning of a particular enterprise or company. Determining periodically this indicator, the manager can determine how beneficial it is for a particular market or a specific production.
Why is this needed?
By calculating several financial indicators, based on a thorough analysis of the balance sheet data, the company can evaluate the profitability of its core business. Also, using these calculations, any company has the opportunity to evaluate in detail the partial financial condition of various counterparties in whose favor various products are delivered.
One of the most important business indicators that demonstrate the effectiveness and success of an enterprise is the profitability of its core business. Different ratios of profitability allow you to determine how profitable is the business of a particular company, and whether it, doing it in the first place, can remain solvent and liquid.
How to calculate?
Like other indicators of financial analysis, the profitability of the core business is calculated based on the data that are provided in the process of generating balance sheets. In particular, this applies to the statement of losses and profits of the enterprise, the balance sheet and many other similar documents. However, in order to calculate profitability (the formula is presented below), initially only these two documents can be used.
What is he showing?
The profitability ratio allows you to determine the amount of net profit that the company receives from each ruble spent by it on production. If the business process was really well organized, then for a long time this indicator will constantly increase. In order to accurately determine the profitability indicators, it is necessary to divide the profit from the sale of certain products indicated in the income statement by the amount of funds spent on the manufacture of these products.
Formula
Thus, there is nothing difficult in calculating profitability as accurately as possible. The formula is as follows:
- Profitability coefficient OD = profit from sales: financial costs of manufacturing products.
Return on sales
An equally important indicator determining the current financial condition of the organization is the profitability ratio of sales, which, in contrast to the above ratio, shows the amount of net profit that each individual ruble of revenue brings to this company. If in the process of the firm's work this coefficient will constantly increase, then this will also indicate an improvement in its financial condition and the profitability of its core business.
Formula
To determine the profitability of sales, you will need to use the following formula:
- Profitability ratio of sales = profit from sales: revenue from sales.
Additional views
It is worth noting the fact that in addition to the profitability indicator, other types of ratios can be used in the process of conducting financial analysis.In particular, this refers to the so-called coefficient of business activity, which demonstrates the effectiveness of how the company uses its financial assets and tools. These include, first of all, the turnover ratio, which demonstrates the efficient use of all the funds that are at the disposal of this company, as well as inventory turnover, which shows how quickly the company can realize its inventory values. It also includes a number of other indicators.
All about the detailed calculation of the profitability of OD
However, despite the fact that there are many other factors, one of the most important is the profitability of the enterprise, or rather, the profitability of its core business, which determines the success of a company.
Under this concept is meant an indicator that determines the relative economic efficiency of a particular organization. Together, this indicator allows you to understand how effectively the company uses the labor, material and financial resources that it currently has. To calculate the profitability ratio, the ratio of income to assets and those resources that are used to form it is determined.
In other words, if you want to evaluate the profitability of an enterprise and its core business, you only need to have on hand the ratio of expenses to income.
How is the calculation made?
The profitability of the company’s production activity is determined by the ratio of the profit received from the sale of a certain product minus depreciation for the reporting reporting period and the financial costs that were necessary for the sale of these products. In addition, by determining this indicator, you can determine how much profit the company receives from each ruble spent by it for the manufacture and further sale of certain products.
Analysis of the profitability of the enterprise can be carried out both in the whole company, and in any individual segments of manufactured products. Product Profitability allows you to more accurately reflect the performance of a particular company in comparison with the OD ratio, since in this case not only the net profit is taken into account, but also the full amount of earned funds received from the turnover.
The equation
Analysis of the profitability of the enterprise and its individual products is as follows: profit indicators are divided by sales indicators, after which the amount received is multiplied by 100. This feature is used to determine these indicators in percent. Thus, through simple calculations, you can determine the profitability of products, as well as profitability level core business.
Deeper study
In order to study the level of profitability more deeply, you will need to consider in detail why prices are changing, determine the cost of each individual unit of production and how this amount directly affects profitability itself. In serious companies, specialists not only calculate the profitability of the core business, but also carry out similar calculations for each individual type of product.
Since the financial result of the activities of a certain company is the difference between its expenses and revenues, to determine it you will need to correlate these indicators for a certain reporting period. At the same time, it is worth noting the fact that, since all expenses and incomes can relate to several reporting periods, it is best to initially use a certain system for dividing them by time. This is ensured by an appropriate capitalization right.
Thus, the overall result of the company’s activity increases or decreases by expenses related to this period. In other words, the company's expenses for the production of a particular product will be written off directly in the period when they brought the company revenue, and if they are unprofitable, then the fact that the company’s work is unprofitable is obvious. All these indicators are taken into account in the balance sheet.
That is how the profitability coefficient of the main activity changes, the formula of which was presented above.
Retained earnings
The balance sheet profit of the company is the profit that is obtained in the process of work according to the results of the reporting period. It provides the basis for determining income tax. In other words, this indicator helps to identify the company's profits until the moment when it will be charged with taxation. In order to calculate the value of this indicator, it will be necessary to remove the following from the amount of revenue that comes from the sale of certain goods and services:
- the cost of goods sold or services provided;
- all kinds of selling and management costs;
- balance from any operating activity;
- balance from non-operating activities.
In order to determine the average value of the production assets of the company, initially you need to determine them book value at the end and beginning of the period under review. After that, by applying the formula to determine a simple average, you need to calculate in detail the average cost of all the company's property for the reporting period.
Is the company competitive?
Assessing the competitiveness of a company is a determination of how effectively it is managed, as well as how correctly it uses labor, production and economic resources, after which all the indicators obtained are compared with the results of competitors. In the overwhelming majority of cases, the calculation of the competitiveness of an organization is carried out in the process of drawing up business plans necessary to attract investment or lending.
How to determine it?
The determination of competitiveness is carried out on the basis of a number of factors, however, the most objective result can be achieved through the use of mathematical evaluation technologies, when a detailed calculation of the coefficients is carried out, as well as their further comparison with industry average indicators. That is why it is so important to increase the profitability of the core business.
The competitiveness coefficient is the sum of the coefficients of all its components, including strategic positioning and operational efficiency. At the same time, it is worth noting that operational efficiency is the best result of conducting the company's activities among all competitors.
