How to calculate business profitability

In connection with the current situation on the world market and the instability of the economy as a whole, owners are devoting more and more time to analyzing the activities of their enterprises. Using this analysis, you can objectively assess the solvency of the company, the effectiveness and profitability of its activities, as well as development prospects. To reduce costs and manage the company, profitability indicators are the most effective.

Instruction manual

1

The most significant indicator that you can calculate when assessing the profitability of a business is the return on equity. The owners of the enterprise receive the return on their investments in the form of contributions to the authorized capital. In exchange for this, they are entitled to an appropriate share of the profits. Therefore, from the point of view of owners, return on equity is the most important indicator of the company’s activity, since it characterizes the amount of profit that the owner will receive from each ruble of invested funds.

2

Another indicator characterizing the effectiveness of the enterprise is asset turnover. It reflects how many times during the period the capital invested in the assets of the company is circulating. This indicator characterizes the intensity of use of all assets, regardless of the sources of their formation. In addition, asset turnover shows how much of the revenue an enterprise receives from each ruble of funds invested in assets. An increase in this indicator indicates a more efficient use of them.

3

Use the profitability of sales as the main indicator of the performance of enterprises with relatively small volumes of fixed assets and equity. It is defined as the ratio of profit from product sales (operating profit) to sales (revenue) for a certain period. Profitability of sales shows how much net profit a company receives from each ruble of sold products, or how much money remains at its disposal after covering costs, paying taxes and interest on loans.

4

To assess the effectiveness of operational activities, you can use the indicator of return on assets. It is the main production indicator reflecting the efficiency of using invested funds. Return on assets is defined as the ratio of net profit to average value of assets for a certain period. It depends on two factors: profitability of sales and asset turnover.

effective profitability