Every year, many new companies come to the market, the purpose of which is to make a profit, which is quite logical. But in order to stay afloat, it is necessary to conduct constant analytics of the enterprise, allowing to assess the level of its profitability. The profitability of total capital shows the efficiency of use of all resources of a particular organization and therefore is one of the most relevant indicators in the business sector.
The level of profitability of the enterprise
The current market is developing dynamically, and some trends are rapidly replaced by others, so every company whose management is focused on stable growth should monitor the economic performance of the organization. The data obtained as a result of such an analysis will allow us to correctly plan production work, which, in turn, will lead to maximum profit growth.
In turn, the degree of efficiency of an enterprise can only be assessed by defining a general indicator such as profitability level. By calculating the profitability of the enterprise, you can give an accurate assessment of its financial results and the level of development in general. Profitability involves calculating the profitability of an enterprise from various positions, which allows you to display the work of all components of the company.
Total capital
Before delving into a topic such as the profitability of total capital, it is necessary to understand the semantic load that is hidden in these terms.
Under the total capital is understood as the total number of all assets, goods, property and other resources that are used to make a profit. If we consider this concept in a narrower sense, we can say that we are talking about a source of income, having the form of means of production (defined as physical capital). Investments (cash and material resources invested in the economy) also make sense to refer to the group of total resources.
If you try to look at this topic in a broad sense, then capital can be given the following characteristic - this is the value that generates the income stream.
Types of Investments
Considering the profitability of total capital, it is necessary to study the various types of formation of fixed assets of the company. Investments involve the use of various sources of financing, which have their own distinguishing features:
- The principle of formation. Share capital, funds of partner companies, team companies, as well as investment resources are used.
- The form of ownership, which is based on the classification of organizations and enterprises (private and state capital).
- By the nature of the use by the owners. Used and reinvested capital, which is used for consumption and is disinvestment.
- By affiliation to the organization. The funds that are owned by the company on the basis of property rights and are reflected in the 3rd section of the balance sheet: borrowed capital attracted on a repayable basis and is a financial liability of the company.
Profitability
Under the profitability of the enterprise or business you need to understand the rate of return, which is expressed as a percentage. Sometimes this term is used to determine the effectiveness of activities (relevant for non-profit enterprises). It can be said that profitability is an indicator for the determination of which the calculation of the ratio of costs to profits is used.In other words, there is a fixation of the fact how much the income received covers the existing expenses of the company.
Total return on assets
In order to understand this topic, it is worth exploring various types of profitability. When it comes to the relative total rate of return on assets, we mean a value that displays the amount of funds attracted by the enterprise to obtain one ruble of profit.
To calculate this indicator in the case of both non-current and current assets, you need to correlate the profit with the average value of all the resources of the enterprise within a certain period of time, say, for a year and a half.
As for the sources that form the assets, the level of their profitability is determined by the ratio of the profit before tax payments and the average value of the assets of current and non-current for a specific period of time.
Production profitability
Continuing to consider the types of profitability, it is worth paying attention to this direction of the payback assessment. In this case, we have in mind a generalizing indicator, the use of which is relevant for characterizing the economic efficiency of the enterprise and its divisions. To identify this indicator, it is necessary to correlate net income with the cost of production. If, as a result of the calculations, the income from sales is higher than production costs, then the company can be defined as profitable.
The key growth factors indicators of production profitability are improving product quality and reducing its cost.
Profitability analysis of operating activities
This is another type of profitability indicator that displays the financial results that have resulted from various operations and circumstances. The essence of the analysis is to study the dynamics and causes of the resulting losses and profits in each case, not related to the sale of products.
For example, losses that relate to fines arising from a violation by a particular service of the contractual terms of cooperation with other organizations, enterprises and institutions. During the analysis, the reasons for making mistakes are determined and appropriate measures are taken to prevent such shortcomings in the future.
Return on total capital - formula
It is worth remembering that total capital combines working capital and non-current assets. The indicator of their profitability comes down to identifying the assets attracted by the company to receive revenue of one ruble.
Given this circumstance, you can determine the profitability of any company. But it is important to understand that the profitability of total capital is only estimated by the ratio of the value of all assets for a certain period before taxes have been paid.
In this case, the profitability formula is reduced to division operating profit total assets. In practice, the fact of attracting investments will indicate a decrease in the return on total capital.
The calculation of the aggregate indicator is very similar to the standard formula for the profitability of fixed assets, which has the following form: return on equity is equal to the ratio of net profit that was received by the enterprise for a specific period of time to the average annual amount of equity of the company.
Balance use
When determining such an indicator as return on total capital, the balance sheet calculation formula may also be relevant. First of all, the sums of borrowed and equity capital, including ordinary, preference shares, retained earnings and additional paid-in capital.
When identifying total capital in the balance sheet figures for a specific year, you need to add the indicator of share capital and only long-term debt.Short-term debts should not be taken into account, since they are repaid within a year.
Next, you need to divide the net income (dividends must be deducted initially) by total capital. Thus, the return on total capital will be obtained. The formula for calculating the balance sheet, as you can see, is quite simple.
How to determine the status of assets
The profitability of property owned by the company is one of the key indicators of its stability. In order to calculate the profitability of the total capital of assets, it is necessary to use the following calculation scheme: profitability indicator = net profit / average annual value of assets × 100%.
In other words, the profitability indicator is the profit that remained at the disposal of the enterprise after dividing by the amount of assets and then multiplied by 100%. At the same time, the level of profitability may increase if the volume of borrowed resources increases in relation to the total amount of the company's own assets.
Equity
Given that economic profitability total capital shows the total return on resources, it is necessary to pay attention to the company's own funds, which have a significant impact on the development of the enterprise.
In order to calculate the state of equity, you need to use the following formula: the profit that the company has left, multiplied by 100% and divided by the amount of equity.
It should be noted that this calculation scheme differs from the principle that determines the profitability of total capital, the formula of which is as follows: ROTA = EBIT / assets of the company. Where ROTA is directly the profitability indicator itself, and EBIT is the profit from which taxes and interest were deducted (operating).
If the goal is to determine the degree to which the company uses financial leverage to increase profitability, then you need to compare the return on equity and borrowed assets.
It is worth noting that the fixed assets of the company will provide greater returns if the percentage of borrowed resources in the total share of sources of income is dominant.
The effect of financial leverage
In the framework of such a topic as the coefficient of profitability of total capital, it is worth paying attention to the difference between the return on own resources and the total amount of company funds. The indicator obtained as a result of such a comparison is called the effect of financial leverage. In other words, the calculation of the growth of capital of the enterprise through the use of credit money.
But in order for such a scheme to give a real increase in profit, it is necessary to fulfill the following condition: the return on assets minus the interest that is paid for the use of the loan should be above zero.
Studying such an indicator as the return on total capital, the calculation of which was given above, it makes sense to pay attention to the shoulder of financial leverage. Under this definition is understood as the share of borrowed funds in the total amount of sources of finance that form the property of the enterprise.
In some cases, companies with a significant amount of their own resources, it is profitable to take loans. This is due to the fact that the profitability of total capital (including equity) will increase significantly, since the income resulting from the investment of borrowed funds will significantly exceed the interest on the loan.
It is easy to conclude that the determination of the profitability of an enterprise by assessing total and own assets is a necessary measure for the competent and stable development of the company. Without such analytics in a constantly changing market with increasing levels of competition, it will be difficult to survive.
