When calculating the average annual rate of return is used. Net profit rate standard value

Hello! Today we’ll talk about profitability, what it is and how to calculate it. aimed at making a profit. The correct operation and effectiveness of the management methods used can be assessed using certain parameters. One of the most optimal and informative is the profitability of the enterprise. For any entrepreneur, understanding this economic indicator is an opportunity to assess the correctness of resource consumption in the enterprise and adjust further actions in all directions.

Why calculate profitability

In many cases, the financial profitability of an enterprise becomes a key indicator for analyzing the activities of a business project, which helps to understand how well the funds invested in it pay off. Correctly calculated indicators for several factors and items are used by the entrepreneur for pricing services or goods, for general analysis at the working stage. They are calculated as a percentage or used in the form of a numerical coefficient: the larger the number, the higher the profitability of the enterprise.

In addition, it is necessary to calculate enterprise profitability ratios in the following production situations:

• To forecast the possible profit that the company can receive in the next period;
• For comparative analysis with competitors in the market;
• To justify large investment investments, helping a potential transaction participant determine the projected return on a future project;
• When determining the real market value of a company during pre-sale preparation.

Calculation of indicators is often used when lending, obtaining loans or participating in joint projects, developing new types of products.

Enterprise profitability

Discarding scientific terminology, we can define the concept:

Enterprise profitability as one of the main economic indicators that well characterizes the profitability of an entrepreneur’s labor. Its calculation will help you understand how profitable the chosen project or direction is.

Many resources are used in the production or sales process:

• Labor (hired workers, personnel);
• Economic;
• Financial;
• Natural.

Their rational and correct operation should bring profit and constant income. For many enterprises, analysis of profitability indicators can become an assessment of operating efficiency for a certain (control) period of time.

In simple words, business profitability is the ratio between the costs of the production process and the resulting profit. If after a period (quarter or year) a business project has produced a profit, then it is called profitable and beneficial for the owner.

To carry out correct calculations and predict indicators in future activities, it is necessary to know and understand the factors that influence profitability to varying degrees. Experts divide them into exogenous and endogenous.

Among exogenous ones there are:

• Tax policy in the state;
• General sales market conditions;
• Geographical location of the enterprise;
• Level of competition in the market;
• Features of the political situation in the country.

In many situations, the profitability and profitability of an enterprise is influenced by its geographic location, proximity to sources of raw materials or consumer clients. The situation on the stock market and exchange rate fluctuations have a huge impact.

Endogenous or internal production factors that greatly influence profitability:

• Good working conditions for personnel of any level (which necessarily has a positive effect on product quality);
• Efficiency of the company's logistics and marketing policy;
• General financial and management policies of management.

Taking into account such subtleties helps an experienced economist make the level of profitability as accurate and realistic as possible.

Factor analysis of enterprise profitability

To determine the degree of influence of any factors on the level of profitability of the entire project, economists conduct special factor analysis. It helps to determine the exact amount of income received under the influence of internal factors, and is expressed by simple formulas:

Profitability = (Profit from sales of products / Cost of production) * 100%

Profitability = ((Product price - Product cost) / Product cost)) * 100%

Typically, when conducting such financial analysis, a three-factor or five-factor model is used. Quantity refers to the number of factors used in the counting process:

• For the three-factor factor, the profitability of manufactured products, the indicator of capital intensity and turnover of fixed assets are taken;
• For the five-factor it is necessary to take into account labor and material intensity, depreciation, and turnover of all types of capital.

Factor calculation is based on the division of all formulas and indicators into quantitative and qualitative, which help to study the development of the company from different angles. It shows a certain relationship: the higher the profit and capital productivity from the production assets of an enterprise, the higher its profitability. It shows the manager the relationship between standards and business results.

Types of profitability

In various production areas or types of business, specific indicators of enterprise profitability are used. Economists identify three significant groups that are used almost everywhere:

1. Profitability of products or services: the basis is the ratio of the net profit received from the project (or direction in production) and the costs spent on it. It can be calculated both for the whole enterprise and for one specific product;
2. Profitability of the entire enterprise: this group includes many indicators that help characterize the entire enterprise as a whole. It is used to analyze a working project by potential investors or owners;
3. Return on assets: a fairly large group of various indicators that show the entrepreneur the feasibility and completeness of using a certain resource. They allow you to determine the rationality of using loans, your own financial investments or other important assets.

Analysis of the profitability of an enterprise should be carried out not only for internal needs: this is an important stage before large investment projects. It may be requested when providing a loan, or it may become the starting point for enlarging or reducing production.

A real complete picture of the state of affairs at the enterprise can be obtained by calculating and analyzing several indicators. This will allow you to see the situation from different angles and understand the reason for the decrease (or increase) in expenses for any items. To do this, you may need several coefficients, each of which will reflect a specific resource:

1. ROA – return on assets;
2. ROM – level of product profitability;
3. ROS – return on sales;
4. ROFA – return on fixed assets;
5. ROL – personnel profitability;
6. ROIC – return on investment in an enterprise;
7. ROE – return on equity.

These are just a small number of the most common odds. To calculate them, it is enough to have figures from open sources - the balance sheet and its annexes, current sales reports. If an estimated assessment of the profitability of a business for launch is needed, the data is taken from a marketing analysis of the market for similar products or services, from competitors’ reports available in a general overview.

Calculation of enterprise profitability

The largest and most general indicator is the level of profitability of the enterprise. To calculate it, only accounting and statistical documentation for a certain period is used. In a more simplified version, the formula for enterprise profitability looks like this:

P= BP/SA*100%

• P is the main profitability of the enterprise;
• BP is an indicator of balance sheet profit. It is equal to the difference between revenue received and cost (including organizational and management costs), but before taxes are subtracted;
• CA is the total cost of all current and non-current assets, production facilities and resources. It is taken from the balance sheet and its annexes.

For the calculation, you will need the average annual cost of all tangible assets, the depreciation of which is used in the formation of the selling price for services or goods.

If the assessment of the enterprise's profitability is low, then certain management measures should be taken to improve the situation. It may be necessary to adjust production costs, reconsider management methods or rationalize the use of resources.

How to calculate return on assets

A complete analysis of an enterprise's profitability indicators is impossible without calculating the efficiency of using various assets. This is the next important stage, which helps to assess how fully all assets are used and understand their impact on profit. When assessing this indicator, pay attention to its level. A low value indicates that capital and other assets are not performing sufficiently, while a high value confirms the correct management tactics.

In practice, the return on assets (ROA) indicator for an economist means the amount of money that falls on one unit of assets. In simple words, it shows the financial return of a business project. Calculation for all types of assets must be carried out regularly. This will help to timely identify an object that does not bring return or benefit in order to sell it, lease it or modernize it.

In economic sources, the formula for calculating return on assets looks like:

• P – profit for the entire analyzed period;
• A is the average value by type of asset for the same time.

This coefficient is one of the three most revealing and informative for a manager. A value less than zero indicates that the enterprise is operating at a loss.

Return on fixed assets

When calculating assets, the profitability ratio of fixed assets is separately identified. These include various means of labor that are directly or indirectly involved in the production process without changing the original form. The period of their use must exceed a year, and the amount of depreciation is included in the cost of services or products. Such basic means include:

• Any buildings and structures in which workshops, offices, laboratories or warehouses are located;
• Equipment;
• Heavy duty vehicles and loaders;
• Office and work furniture;
• Passenger cars and passenger transport;
• Expensive tool.

Calculating the profitability of fixed assets will show managers how effective the economic activity of a business project is and is determined by the formula:

R = (PR/OS) * 100%

• PE – net profit for a certain period;
• OS – cost of fixed assets.

This economic indicator is very important for commercial manufacturing enterprises. It gives an idea of ​​the share of profit that falls on one ruble of invested fixed assets.

The coefficient directly depends on profitability and should not be less than zero: this means that the company is operating at losses and is using its fixed assets irrationally.

Profitability of products sold

This indicator is no less important for determining the level of profitability and success of the company. In international economic practice, it is designated as ROM and is calculated using the formula:

ROM=Net profit/cost

The resulting coefficient helps determine the efficiency of sales of manufactured products. In fact, this is the ratio of sales income and costs of its production, packaging and sale. For an economist, the indicator clearly demonstrates how much each ruble spent will bring in percentage terms.

The algorithm for calculating the profitability of products sold may be more understandable for beginners:

1. The period in which it is necessary to analyze the indicator is determined (from a month to a whole year);
2. The total amount of profit from sales is calculated by adding up all income from the sale of services, products or goods;
3. Net profit is determined (according to the balance sheet);
4. The indicator is calculated using the above formula.

A good analysis will include a comparison of profitability of products sold over several periods. This will help determine the decline or increase in the company’s income over time. In any case, you can conduct a more in-depth review of each supplier, group of products or assortment, and work through the customer base.

Return on sales

Margin or return on sales is another important consideration when pricing a product or service. It shows what percentage of total revenue comes from the profit of the enterprise.

There is a formula that helps calculate this type of indicator:

ROS= (Profit / Revenue) x 100%

As a basis for calculation, different types of profit can be used. Values ​​are specific and vary depending on the product range, company activity and other factors.

Sometimes experts call return on sales the rate of profitability. This is due to the ability to show the share of profit in total sales revenue. It is also calculated over time to track changes over several periods.

In the short term, a more interesting picture can be given by operating profitability of sales, which can be easily calculated using the formula:

Operating return on sales = (Profit before tax / Revenue) x 100%

All indicators for calculations in this formula are taken from the “Profit and Loss Statement”, which is attached to the balance sheet. The new indicator helps the entrepreneur understand what real share of revenue is contained in each monetary unit of his revenue after paying all taxes and fees.

Such indicators can be calculated for a small enterprise, one department or an entire industry, depending on the task at hand. The higher the value of this economic coefficient, the better the enterprise performs and the more profit its owner receives.

This is one of the most informative indicators that helps determine how profitable a business project is. Without calculating it, it is impossible to draw up a business plan, track costs over time, or assess the profitability of the enterprise as a whole. It can be calculated using the formula:

R=VP/V, Where:

• VP – gross profit (calculated as the difference between the revenue received from the sale of goods or services and the cost);
• B – proceeds from sale.

The formula often uses a net profit indicator, which better reflects the state of affairs at the enterprise. The amount can be taken from the balance sheet appendix.

Net profit no longer includes income tax, various selling and overhead expenses. It includes current operating costs, various penalties and paid loans. To determine it, the total revenue that was received from the sale of services or goods (including discounts) is calculated. All expenses of the enterprise are deducted from it.

It is necessary to carefully select the time period depending on the task of financial analysis. To determine the results of internal control, the calculation of profitability is carried out over time regularly (monthly or quarterly). If the goal is to obtain an investment or loan, a longer period is taken for comparison.

Obtaining the profitability ratio provides a lot of information for the management personnel of the enterprise:

• Shows the correspondence between actual and planned results, helps evaluate business performance;
• Allows you to conduct a comparative analysis with the results of other competing companies in the market.

If the indicator is low, the entrepreneur needs to think about improving it. This can be achieved by increasing the amount of revenue received. An alternative is to increase sales, raise prices slightly, or optimize costs. You should start with small innovations, observing the dynamics of changes in the coefficient.

Personnel profitability

One interesting relative indicator is personnel profitability. Almost all enterprises, regardless of their form of ownership, have long taken into account the importance of effective labor management. They influence all areas of production. To do this, it is necessary to monitor the number of personnel, their level of training and skill, and improve the qualifications of individual employees.

The profitability of personnel can be determined using the formula:

• PE – net profit of the enterprise for a certain period of time;
• CH – number of employees at different levels.

In addition to this formula, experienced economists use more informative ones:

1. Calculate the ratio of all personnel costs to net profit;
2. The personal profitability of one employee, which is determined by dividing the costs associated with him by the share of profit brought to the enterprise budget.

Such a complete and detailed calculation will help determine labor productivity. Based on it, you can carry out a kind of diagnostics of jobs that may be reduced or need to be expanded.

Do not forget that the profitability of personnel may be affected by low-quality or old equipment, its downtime or other factors. This can reduce performance and incur additional costs.

One of the unpleasant, but sometimes necessary methods is often reducing the number of employees. Economists must calculate the profitability for each type of personnel in order to highlight the weakest and most vulnerable areas.

For small enterprises, regular calculation of this coefficient is necessary in order to adjust and optimize their expenses. With a small team, it is easier to carry out calculations, so the result can be more complete and accurate.

Profitability threshold

For many trading and manufacturing enterprises, calculating the profitability threshold is of great importance. It means the minimum volume of sales (or sales of finished products), at which the revenue received will cover all costs of production and delivery to the consumer, but without taking into account profit. In fact, the profitability threshold helps the entrepreneur determine the number of sales at which the enterprise will operate without losses (but will not make a profit).

In many economic sources, this important indicator can be found under the name “break-even point” or “critical point”. It means that the enterprise will receive income only if it overcomes this threshold and increases the coefficient. It is necessary to sell goods in quantities that exceed the volume obtained according to the formula:

• PR – threshold (norm) of profitability;
• FZ – fixed costs for sales and production;
• Kvm – gross margin coefficient.

The last indicator is pre-calculated using the formula:

Kvm=(V – Zpr)*100%

• B – enterprise revenue;
• Zpr – the sum of all variable costs.

The main factors influencing the profitability threshold ratio:

• Product price per unit;
• Variable and fixed costs at all stages of production and sale of this product (service).

With the slightest fluctuation in the values ​​of these economic factors, the value of the indicator also changes up or down. Of particular importance is the analysis of all expenses, which economists divide into fixed and variable. The first include:

• Depreciation for fixed assets and equipment;
• Rent;
• All utility costs and payments;
• Salaries of enterprise management employees;
• Administrative costs for their maintenance.

They are easier to analyze and control, and can be monitored over time. Variable costs become more “unpredictable”:

• Wages of the entire workforce of the enterprise;
• Fees for servicing accounts, loans or transfers;
• Costs for the purchase of raw materials and components (especially when exchange rates fluctuate);
• Payment for energy resources spent on production;
• Fare.

If a company wants to remain consistently profitable, its management must control the rate of profitability and analyze expenses for all items.

Any enterprise strives to develop and increase capacity, open new areas of activity. Investment projects also require detailed analysis, which helps determine their effectiveness and adjust investments. In domestic practice, several basic calculation methods are more often used, giving an idea of ​​what the profitability of a project is:

1. Methodology for calculating net present value: it helps determine the net profit from a new project;
2. Methodology for calculating the profitability index: necessary to generate income per unit of cost;
3. Method for calculating marginal efficiency of capital (internal rate of return). It is used to determine the maximum possible level of capital expenditure for a new project. The internal rate of return is most often calculated using the formula:

INR = (current net worth / current initial investment amount) * 100%

Most often, such calculations are used by economists for certain purposes:

• If necessary, determine the level of expenses in the case of developing a project using raised funds, loans or credits;
• To prove cost-effectiveness and document the benefits of the project.

If there are bank loans, calculating the internal rate of return will give the maximum allowable interest rate. Exceeding it in real work will mean that the new enterprise or direction will be unprofitable.

1. Methodology for calculating the return on investment;
2. A more accurate modified method for calculating the internal rate of return, for the calculation of which the weighted average cost of the advanced capital or investment is taken;
3. An accounting rate of return technique that is used for short-term projects. In this case, profitability will be calculated using the formula:

RP=(PE + depreciation/amount of investment in the project) * 100%

PE – net profit from a new business project.

A full calculation in various ways is done not only before developing a business plan, but also during the operation of the facility. This is a necessary set of formulas that owners and potential investors use when trying to assess the possible benefits.

Ways to increase enterprise profitability

Sometimes the analysis produces results that require serious management decisions. To determine how to increase profitability, it is necessary to understand the reasons for its fluctuations. To do this, the indicator for the reporting and previous periods is studied. Typically, the base year is the past year or quarter in which there was high and stable revenue. What follows is a comparison of the two coefficients over time.

The profitability indicator may be affected by changes in selling prices or production costs, increases in costs or the cost of raw materials from suppliers. Therefore, it is necessary to pay attention to factors such as seasonal fluctuations in the demand of product buyers, activity, breakdowns or downtime. When solving the problem of how to increase profitability and profitability, it is necessary to use various ways to increase profits:

1. Improve the quality of products or services and their packaging. This can be achieved by modernizing and re-equipping its production facilities. This may require serious investment at first, but in the future it will more than pay off in resource savings, a reduction in the amount of raw materials, or a more affordable price for the consumer. You can consider the option;
2. Improve the properties of your products, which will help attract new consumers and become a more competitive company in the market;
3. Develop a new active marketing policy for your business project and attract good management personnel. Large enterprises often have an entire marketing department that deals with market analysis, new promotions, and finding a profitable niche;
4. Various ways to reduce costs in order to compete with a similar range. This should not come at the expense of the quality of the product!

The manager needs to find a certain balance among all the methods in order to achieve a lasting positive result and maintain the enterprise’s profitability indicators at the proper level.

No one does business at a loss. Even the sale of seeds brings a certain profit to the seller. But here it’s easy to figure out what it will be and where to use it. At enterprises, profit issues are more difficult to resolve - first you need to find funds, invest them, sell goods, pay off debts, and get a net profit. How is profit margin calculated in production? Let's try to figure it all out.

Profit and expenses in production

In any field of activity, and especially in production, profit and expenses are considered important concepts. These are the main economic indicators that directly form the reason and financial features of the enterprise’s activities. In order for an enterprise to ultimately form a net profit rate, it is always necessary to incur expenses. The important point is that expenses do not exceed income, otherwise the organization’s activities are meaningless. Therefore, expenses must be distributed correctly. But profit depends on how correctly employees distribute these costs and in what direction they will be directed.

Profit Rate: Definition

Having understood some concepts, it will become easier to understand the features of production economics. Thus, the rate of profit is the percentage ratio between the profit for a certain period to the capital advanced before its start. In other words, this indicator reflects the increase in capital that was invested at the beginning of the reporting period. The funds advanced, in turn, include wages to workers and production costs. The main thing in this definition is the mass of profit.

What influences profit dynamics?

The rate of profit, like any other economic indicator, depends on many factors. One of the factors influencing its dynamics is the market price and the market macroeconomic state. And, of course, the rate of net profit depends on supply and demand in the market. This indicator determines the return on investment in relation to the amount of money invested.

When there is a difference between these indicators in the direction of decreasing demand for the company's products, this indicates that the profit rate is at a low level and there is a threat of loss.

Its dynamics are influenced by changes:

• capital structure, if expenses on elements of constant capital are lower, then the rate of profit becomes higher, and vice versa;
• capital turnover rate - the higher it is, the better the effect on profit; greater income comes from short-term capital turnover, as opposed to long-term capital turnover.

Factor determining the rate of profit

The main determining factors of the rate of profit are considered to be the mass of profit, the rate of capital turnover, the cost structure of the money invested, the scale of the means of production and their savings. Each of these factors has its own impact on income and its components. But the biggest impact on profitability is the weight of the profit. This is the absolute value of the profit received. The higher this indicator, the more profitable the business. This approach helps determine the right steps in the subsequent development of the business.

How can profit be expressed?

Profit can be expressed in the profitability of the enterprise. Since this indicator is very closely intertwined with the rate of profit. What does this mean? Just like profit, the real indicator can be determined at the end of the project life cycle.

The qualitative measurement of profit is the direct rate of profit, which is calculated by the ratio of surplus value to advanced capital.

The owner can calculate the income received as a percentage of the invested funds or in monetary units common in many countries. At the moment, dollars are used when receiving and calculating profits.

How is this indicator calculated?

Profit is the final result of an enterprise’s activities, which is determined by the following formula:

P=E-W total,

where "P" is profit, "B" is revenue from sales of products, "Z total." – the total costs of creating a product and promoting it.

The calculation of the rate of return is determined by the ratio of net profit to total capital investment. Data is obtained as a percentage.

This allows you to determine the valuation of projects that directly require capital investment. And based on the data obtained, you can draw conclusions.

The higher the profit value indicator, the better for the enterprise, since profit can be invested in the further development of the organization’s project or the expansion of production. This will have a positive impact on the company’s activities and increased income in the future. Based on profit indicators, one can judge the feasibility of investing funds in the company. The value of this indicator speeds up the decision-making process.

Two ways for an enterprise to generate income

The internal rate of return is the type of return that occurs when investments and cash flows from investments are equal. In this case, the company will receive income in two ways:

• investments of capital at IRR (%) in any monetary instruments;
• investments of capital that produce cash flow, in this case all components of this flow are invested at IRR (%).

IRR in this case plays the role of a barrier. For an investor, this is a very important indicator, because after studying it, he sees whether to develop the project or reject it. If the cost of the invested funds is higher than the value of this indicator, then the project will be unprofitable and should be rejected.

IRR is the ratio of the cost of capital raised and the benefits of the project, taking into account the funds spent. The most favorable value of this indicator is achieved by reducing the time between discount rates.

How is the average rate of profit determined?

There is a natural mechanism for the formation of the average rate of profit. This value is no longer determined specifically by the market; it is formed by owners (capitalists) and investors. Here the leading role is played by the emergence of competition, which we will discuss below.

In general, the process of formation of the average rate of profit is that capitalists, seeing a fairly high profit received by the company, strive to earn more money in production. For this reason, more favorable sales conditions are being developed. Investors also seek to pour their capital into an industry that will generate profits. Intra-industry competition arises as more homogeneous industries appear. But inter-industry competition may also arise, which also determines the formation of the average rate of profit.

The influence of competition on this indicator

The average rate of profit is affected by two types of competition: inter-industry and intra-industry.

Intra-industry competition is rivalry in one industry where homogeneous goods are produced. Here all efforts and resources are directed to the production of this product. In this case, its cost increases. In the market, product competition is determined not by individual, but by equal social value. And its magnitude is determined by average indicators. As a result, the enterprise's profit margin may tend to decline, which has a negative impact on the overall operation. To avoid such a phenomenon, capitalists strive to introduce new technologies that facilitate a rapid production process with minimal costs and try to match market prices without losses.

Inter-industry competition is competition between the capitalists themselves from different industries, where profits and profit rates are at a higher level. Since capital is poured into various industries, they have different structures. As is known, surplus value is created only by attracting hired workers; less capital accounts for the corresponding mass of surplus value. And in enterprises with a high organic composition of capital, the surplus value will be less. The emergence of this type of competition leads to a transfer of funds from one industry to another. The movement of capital leads to a decrease in surplus value in an industry with a low structure, an increase in the production of goods, a fall in the market price, and a reduction in the industry mass. As a result of the transfusion, the average rate of profit is equalized, which is determined by the formula: P΄ cp = Ʃ m: Ʃ (C+V) × 100%,

Where Ʃm– the total surplus value that is created in different industries;

Ʃ (C+V)- the total capital advanced into various industries.

As a result, the company receives an average profit for all industries.

2 Estimated rate of return (aror)

The second accounting-based method of analyzing capital investments is the estimated rate of return (AROR), also known as return on capital (ROI). As the name suggests, this method compares the profitability of the project and the capital invested. One of the disadvantages of this method is that there are many ways to define the concepts of “income” and “invested capital.” Various earnings estimates may or may not include finance charges, depreciation and amortization, and taxes. However, the most common definition of “income” when calculating AROR is “earnings before interest and taxes,” which includes depreciation and amortization.

Typically, AROR is used in two variations depending on the definition of invested capital. It can include either the initial capital invested or the average capital invested over the life of the investment. The initial capital invested consists of the cost of purchasing and installing fixed assets and increasing working capital required during the initial investment phase. However, in the final phase of the project, the capital invested is reduced to the residual value of the equipment plus the remaining working capital components.

The formula can be presented as:

(2.2),

The results obtained differ markedly from each other. However, if both the establishment of eligibility criteria and the financial analysis are carried out using the same method, the investment decisions made on their basis will not differ.

Like the payback period of investments, the AROR method has its drawbacks. It uses book earnings (rather than cash flows) as a measure of the profitability of projects. It has already been noted that there are many ways to calculate book profit, which makes it possible to manipulate the AROR indicator. Inconsistencies in earnings calculations result in widely varying AROR values, and often these inconsistencies are the result of a change in a firm's accounting policies that may be unfamiliar to the investment decision maker. In addition, book earnings suffer from “distortions” such as depreciation costs and gains or losses on the sale of fixed assets, which are not true cash flows and therefore do not impact investor wealth.

The second important disadvantage of AROR (like RR) is that it does not take into account the time aspect of the value of money. Investment returns are calculated as the average reported earnings, although returns are earned over different periods of time and may vary from year to year.

Another problem with AROR arises when the “average capital employed” case is used. Here, the initial cost and residual value of an investment are averaged to reflect the value of the assets associated over the life of the investment. The higher the residual value of an investment, the higher the denominator in the AROR formula becomes and the lower the calculated rate of return itself.

The residual value paradox is a problem in AROR investment valuation that can lead to poor decision making.

In practice, AROR is very often used to justify investment decisions. This may be because decision makers often prefer to analyze investments in terms of earnings, since the performance of managers themselves is often assessed by this criterion. There is no doubt that the use of this indicator to evaluate projects leads some organizations to making erroneous investment decisions.

Thus, one cannot help but notice that the two main “traditional” methods of analysis are not ideal. Although both are used in practice, they also have a number of serious disadvantages that lead to incorrect investment decisions. In the theoretical literature devoted to investment activity, these methods are not given much attention. They have been supplanted by “sophisticated” methods, the roots of which are in economic theory.

The economic approach to project analysis involves determining the value of the project in comparison with other projects, as well as analyzing the financial attractiveness of the project, subject to limited resources. The most well-known and often used in practice is the net present value (NPV) indicator.

Net present value allows you to obtain the most generalized characteristic of the investment result, that is, its final effect in absolute amount. Net present value is understood as the difference between the amount of cash flow reduced to the present value (by discounting) for the period of operation of the investment project and the amount of funds invested in its implementation.

(2.4),

where NPV is net present value;

DP – the amount of cash flow (in present value) for the entire period of operation of the investment project (before the start of investments in it). If the full period of operation before the start of a new investment in a given object is difficult to determine, it is taken in calculations at the rate of 5 years (this is the average depreciation period of the equipment, after which it must be replaced);

IP – the amount of investment funds (in present value) allocated for the implementation of the investment project.

If we expand the components of the previous formula, it will take the form:

NPV=

(2.5),

Where B – total benefits for year t;

C – total costs for year t;

t – corresponding year of the project (1,2,3, …n);

i – discount rate (percentage).

Describing the net present value indicator, it should be noted that it can be used not only for a comparative assessment of the effectiveness of investment projects, but also as a criterion for the feasibility of their implementation.

An investment project for which the net present value indicator is negative (see Figure 1a) or equal to zero (see Figure 1b) should be rejected, since it will not bring the investor additional income on the invested capital. Investment projects with a positive net present value (see Figure 1c) allow you to increase the investor’s capital.

The net present value (NPV) indicator has obvious advantages and disadvantages.

The advantage is that this indicator is absolute and takes into account the scale of investment. This allows you to calculate the increase in the value of the company or the amount of investor capital. But these advantages also come with disadvantages.

The first is that the value of net present value is difficult, and in some cases impossible, to normalize. For example, the net present value of a certain project is 20 thousand UAH. Is it a lot or a little? It is difficult to answer this question, especially if we consider a non-alternative project. You can, of course, set a lower limit for the amount of net present value, if not reached, the project is rejected. But this is largely a voluntary measure that does not reflect the essence of the investment process.

The second drawback is related to the fact that net present income does not clearly show what investment efforts resulted in the result. Although the size of the investment is taken into account in the calculation of net present value, a relative comparison is not made.

D Another general criterion, which is much less often used in the practice of design decisions, is the benefit-cost ratio. It is defined as the sum of discounted benefits divided by the sum of discounted costs.

(2.6),

The criterion for selecting projects using the benefit-cost ratio is that if the coefficient is equal to or greater than one, the project implementation is considered successful. Despite the popularity of this indicator. It has flaws. This indicator is not acceptable for ranking the advantages of independent projects and is absolutely not suitable for selecting mutually exclusive projects. This indicator does not show the actual net benefits of the project. For example, a small project may have a significantly higher benefit-cost ratio than a large project, and if you do not use the NPV calculation, you may make an erroneous decision on the project.

Profitability index shows the relative profitability of the project or the discounted value of cash receipts from the project per unit of investment.

The profitability index is calculated using the formula:

(2.7),

where ID is the profitability index for the investment project;

DP – the amount of cash flow in present value;

IP – the amount of investment funds allocated for the implementation of the investment project (if the investments are different in time, also reduced to the present value).

The “profitability index” indicator can also be used not only for comparative assessment, but also as a criterion when accepting an investment project for implementation.

If the value of the profitability index is less than or equal to one, then the project should be rejected due to the fact that it will not bring additional income to the investor. Consequently, investment projects can only be accepted for implementation with a profitability index value above one.

Comparing the indicators “return index” and “net present income”, let us pay attention to the fact that the results of assessing the effectiveness of investments are directly dependent: with an increase in the absolute value of net present income, the value of the profitability index also increases and vice versa. In addition, if the net present value is zero, the profitability index will always be equal to one. This means that only one (any) of them can be used as a criterion indicator of the feasibility of implementing an investment project. But if a comparative assessment is carried out, then in this case both indicators should be considered: net present value and profitability index, since they allow the investor to evaluate the effectiveness of investments from different sides.

Payback period– this is the period during which the amount of income received will be equal to the amount of investment made.

This indicator is calculated using the formula:

(2.8),

where PO is the payback period of the invested funds for the investment project;

IP – the amount of investment funds allocated for the implementation of the investment project (if investments are brought to the present value at different times);

- the average amount of cash flow (in present value) in the period. For short-term investments, this period is taken as one month, and for long-term investments - one year;

n – number of periods.

When characterizing the “payback period” indicator, you should pay attention to the fact that it can be used to assess not only the effectiveness of investments, but also the level of investment risks associated with liquidity (the longer the period of project implementation until its full payback, the higher the level of investment risks ). The disadvantage of this indicator is that it does not take into account those cash flows that are generated after the payback period of investments. Thus, for investment projects with a long service life, after their payback period, a much larger amount of net present value income can be obtained than for investment projects with a short service life (with a similar or even faster payback period).

Internal rate of return(IRR) is the most complex of all indicators from the perspective of the mechanism for its calculation. This indicator characterizes the level of profitability of a specific investment project, expressed by a discount rate at which the future value of cash flow from investments is reduced to the present value of the invested funds. The internal rate of return can be characterized as the discount rate at which the net present value will be reduced to zero through the discounting process.

To determine the internal rate of return, approximate calculation methods are used, one of which is the linear interpolation method. To apply this method, you must perform the following algorithm:

In this picture

is the net present value corresponding to the value of the penultimate interest rate, and

is the net present value corresponding to the value of the last interest rate.

Using the interpolation method, we find the calculated value of the internal rate of return using the formula:

(2.9)

Describing the “internal rate of return” indicator, it should be noted that it is most suitable for comparative assessment. In this case, a comparative assessment can be carried out not only within the framework of the investment projects under consideration, but also in a wider range (for example, comparison of the internal rate of return for an investment project with the level of profitability of the assets used in the current business activities of the company; with the average rate of return on investments; with the norm profitability of alternative investments - deposits, purchase of government bonds). In addition, each company, taking into account its level of investment risks, can set for itself a criterion indicator of the internal rate of return used to evaluate projects. Projects with a lower internal rate of return will be automatically rejected as not meeting the requirements for the effectiveness of real investments. In the practice of evaluating investment projects, such an indicator is called the “marginal rate of internal rate of return.”

Despite some positive properties of the IRR indicator, it has disadvantages:

There may not be a single IRR for a project. Such a variety of solutions can appear if the annual cash flows during the project implementation period change sign (from positive to negative and vice versa) several times. This happens when the income received from the project is reinvested in the project.

The use of one value of the discount rate provides that its value will be constant throughout the entire life of the project. But for projects with a long implementation period (given their high uncertainty in later periods), it is hardly possible to apply a single discount factor throughout the entire life cycle of the project.

Despite such criticism, the IRR indicator is firmly rooted in project analysis and most projects rely on it.

Modern project analysis insists on the joint use of NPV and IRR indicators. The CA criterion for evaluating a project, the internal rate of return, sets the threshold for accepting projects for implementation. Formally, IRR shows the discount rate at which the project does not increase or decrease the value of the company, therefore domestic analysts call this indicator a verified discount. It shows the cutoff value of the discount factor, which divides investments into acceptable and unacceptable.

Let's give an example of calculating efficiency indicators.

A project to develop the production of children's toys has been submitted for consideration. The planned cash flows in thousand UAH that arise as a result of the project are distributed by year:

Let's say the project is being implemented using credit funds at a bank interest rate of 10% per year. Will your decision change if the bank increases the rate to 18%?

To solve the problem, it is necessary to determine the criteria for the net present value of the project, the benefit-cost ratio and the internal rate of return, and calculate the value of discounted cash flows at a discount rate of 10 and 18%. We summarize the calculation results in a table.

			TO 10%	Net Cash Flow = B-W		B(10%) discount	3(10%) discount

At a discount rate of 10%, the NPV of the project is UAH 144.7 thousand. . benefit ratio – costs V/C =

, which indicates the feasibility of implementing the project, because NPV>0 and V/Z>1.

At a rate of 18% NPV = -103.4, since NPV

Let's calculate the IRR value, which reflects the marginal value of the discount rate, above which the project becomes unprofitable.

IRR=10+

Let's draw a conclusion. At a discount rate of 10%, the project is profitable, but if the discount rate increases beyond 14.2%, it becomes unprofitable.

When forming an investment program, there is a need to compare projects with different durations. It is not correct to make comparisons based on NPV indicators taken from business plans. In this case, the method for calculating the NPV of the given flows is used, which is as follows:

The least common multiple (LCM) of the duration of the analyzed projects is determined Z=LCM(i, j);

Considering each of the projects as repeating a certain number of times (n) in period Z, the total NPV for each of the pairwise compared projects is determined using the formula:

NPV =NPV

…) (2.10),

Where NPV i is the net present value of the original project (taken business plan);

n – duration of the project.

i – interest rate;

Example. Select your preferred project from a set of projects A, B, C with different implementation deadlines, using the data:

The least common multiple for the duration of projects is 6. During this period, Project A can be repeated three times, and Project B twice. We analyze projects A and B in pairs. The total NPV of project A (A) in the case of three-fold repetition:

NPV(A)=3.3+

million

Total NPV(B) in case of double repetition:

NPV(B)=

million

Project B is preferable.

We carry out similar comparisons for a pairwise comparison of projects B and C, and we find that in the case of a three-fold repetition of project B, the total NPV will be:

NPV(B)=4.96+

million

In this case, Project B is preferable.

To formulate an investment program, we have a priority number of projects: B, B, A.

If dozens of projects differing in duration are analyzed, calculations take longer. In this case, they can be simplified if we assume that each of the analyzed projects is implemented an unlimited number of times. In this case, the number of terms in the formula for calculating NPV(i, n) will tend to infinity, and the value of NPV(i,+) can be found using the formula for an infinitely decreasing geometric progression:

NPV(i,+) = lim i t NPV(i n) = NPV

(2.11)

Of two pairwise compared projects, the project with a larger NPV(i,+) is preferable.

Project A: NPV(2,+)=3.3*

million

Project B: NPV(3,+)= 5.4*

million

Project B: NPV(2,+)= 4.96*

million

That. the same sequence of projects is obtained: C, B, A.

Cost-benefit analysis

In a market economy, profit is the purpose of existence of enterprises. Profitability characterizes the ability of an enterprise to produce profit, reflecting in general the efficiency of all economic activities of the enterprise.

In general, profitability as an indicator of efficiency is determined by the relationship between the economic and financial benefits received, on the one hand, and the efforts of the enterprise associated with obtaining them, on the other hand. The indicator under consideration can have different forms, depending on the gross or net profit in the numerator and the calculation base expressing effort or costs (economic asset, capital, cost of sales, cost of goods sold at sales price, etc.).

IN analysis it is necessary to present the main indicators that allow you to analyze the level of profitability.

Gross profit margin(indicator 46) characterizes the share of gross profit per leu of net sales.

Its value should remain unchanged or increase dynamically. A decrease in the level of this indicator means an increase in the cost of sales. The gross profit rate is influenced by the following factors: structure of products sold, cost of products sold, selling price. Production volume has no direct effect because, by affecting the numerator and denominator in equal proportions, the effect on the gross profit rate becomes zero. However, production volume has an indirect effect through cost, since in conditions when production volume grows, the cost per unit of production decreases due to fixed costs.

Operating profit margin(indicator 47) reflects the company’s ability to generate profit from its core activities per one lei of sales.

Net profit margin(indicator 48) characterizes the ability of the enterprise to produce net profit received on average by the enterprise per one leu of net sales.

An increase in the level of this coefficient means effective management of the production process. This coefficient depends on the income tax rate and the ability of the enterprise to take advantage of tax benefits. In conditions where the tax rate is stable, the level of net profit depends on the efficiency of using borrowed sources. The net profit rate is analyzed over time and the higher its value, the “richer” the shareholders.

Economic return (ROA)(indicator 49) characterizes the efficiency of funds used in the production process, regardless of whether they are formed from their own or borrowed sources of financing. Its value may be negative if the company incurs losses.

The amount of economic profitability can be increased either by increasing the number of asset turnovers, or by increasing the net profit margin, or both.

The analysis of economic profitability standards is carried out in dynamics and it must be higher than the inflation rate in order for the enterprise to remain in the market. In Moldova, the value is not lower than 10-15%, that is, for every leu there is at least 10-15 bani of profit. (There is an opinion of 20-25%)

The rate of economic profitability will allow the company to update and increase its assets as quickly as possible.

Return on advanced capital (indicator 50)

is a private indicator of economic profitability and reflects economic achievements in the use of production assets, regardless of the order of financing and the tax system.

Financial return (ROE) (indicator 51) measures the return on equity, and, consequently, the shareholder's financial investment in the company's shares.

Financial profitability reveals the degree of efficiency of equity capital and rewards the owners of the enterprise by paying them dividends and increasing reserves, which, in essence, represents an increase in the property of the owners. Recommended level is not less than 15%

Financial profitability depends on the level of economic profitability and the financing structure of the enterprise. It may seem strange, but an increase in financial profitability can be achieved by increasing debt. Like other indicators, return on equity is analyzed over time and in relation to other indicators. A high level of this indicator may be a consequence of insufficient capitalization (a small amount of equity capital invested in the enterprise by shareholders), and not the high efficiency of the enterprise.

Return on sales ratio (shows how much gross profit is per unit of products sold). Gross profit str130F2

Net sales str010F2

Return on investment (ROI) - shows how many monetary units the company needed to obtain one monetary unit of profit.

3 factor model of the Du Pont company.

The main apparatus is strictly determined factor models, which are quite widely used in Western accounting and analytical practice.

For example, to analyze the return on equity ratio, the following strictly determined three-factor relationship is used:

From the presented model it is clear that return on equity depends on the following three factors:

Sales profitability

resource efficiency

Structures of sources of funds advanced to a given enterprise. The significance of the identified factors from the standpoint of current management is explained by the fact that they, in a certain sense, summarize all aspects of the financial and economic activities of the enterprise, in particular, the first factor summarizes the statement of financial results, the second - the balance sheet asset, the third - the balance sheet liability.

RATE OF PROFIT. PROFITABILITY

Being an absolute value, profit is associated with the scale of production and depends on the size of the enterprise, which to a certain extent limits its analytical capabilities as a criterion for the effectiveness of its work in a market economy.

Indicators of profitability (profitability) of an enterprise allow us to evaluate its financial results and, ultimately, efficiency. These indicators usually include the level of profitability, or profitability ratio, which is expressed as the ratio of a particular type of profit to a certain base. Numerous profitability indicators reflect different aspects of the enterprise's activities. It is quite natural that, in general, the efficiency of an enterprise can only be determined by a system of profitability indicators.

Return on sales, which is calculated by the formula:

Rв (ROS)= (P/VR) 100%

where P is profit from sales;

Вр – sales revenue.

An increase in this indicator may reflect an increase in product prices at fixed costs or an increase in demand and, accordingly, a decrease in costs per unit of production. This indicator shows the share of profit in sales revenue, therefore, the ratio of profit to the total cost of products sold. It is with the help of this indicator that an enterprise can decide on the choice of ways to increase profits: either reduce costs or increase production volume. This indicator, calculated on the basis of net profit, is called net return on sales.

Return on assets (return on investment):

R A (ROA)= (P/A) 100%

where P is the profit of the enterprise (profit from sales, balance sheet or net profit can be used);

A – the average value of assets (property) of the enterprise for a certain period.

This indicator reflects the efficiency of use of all property of the enterprise. The dynamics of return on assets is a barometer of the state of the economy. As a factor of production, return on assets and its changes have a stimulating function in that it provides a signal to investors. In this case, the strength of the signal depends on the quantitative assessment or level of return on assets. The average return on assets in Japan is about 10.3%, and in the US -16.8%. In Japan, it is considered profitable if capital investments pay off in 7 years, and in the USA - 4.5 years.

Return on assets can be represented as the product of the following two indicators:

R A = R B * O A = (P/BP) * (BP/A) = (P/A)

where О А – asset turnover, turnover.

Thus, return on assets is primarily influenced by two groups of factors related to return on sales and asset turnover.

Typically, when analyzing return on assets, an analysis of current assets is carried out, i.e. working capital, since their influence on this indicator significantly depends on the condition and organization of working capital. The calculation is carried out using the following formula:

R O C = PE/OS

where PE is the net profit of the enterprise;

OS is the average value of the second asset section of the enterprise’s balance sheet – current assets (working capital).

An enterprise can calculate the profitability of non-current assets (fixed assets and intangible assets) in a similar way, i.e. the first asset section of the balance sheet.

Return on equity (shareholder's) capital reflects the profitability of the enterprise's own funds:

R SK (ROE)= PE/SK

where SK is the average amount of the enterprise’s equity capital for a certain period.

The peculiarity of this indicator is that, firstly, it shows the efficiency of using own funds, i.e. the net profit received per invested ruble, and, secondly, the degree of risk of the enterprise, reflecting the increase in return on equity.

In conjunction with R SC, the famous Dupont formula can be used:

R SK = (ChP/BP) * (BP/A) * (A/SK)

This formula significantly expands the analytical capabilities of the enterprise, as a result of which it is able to determine:

· dynamics of net profit in sales revenue (return on sales);

· efficiency of asset use based on sales revenue and existing trends (asset turnover);

· the capital structure of the enterprise based on the share of equity in assets;

· the influence of the above factors on return on equity.

3. Profit, rate of return

At a certain price level, a decrease in costs leads to an increase in income, i.e., the reverse side of production costs is profit. The lower the costs, the greater the profit and vice versa.

Quantitatively, profit is the difference between income from sales of products and the total costs of its production.

By economic nature, profit is a converted form of net income. The source of net income is surplus and, to a certain extent, necessary labor. Since net income is a distribution category, it can therefore be defined as the realized excess of the value of a product over production costs.

As a result of the deviation of the price of a product from its value, net income does not quantitatively coincide with the value of the surplus product. The isolation of producer costs, which take the form of cost, determines the isolation of income, which takes the form of profit.

A. Smith considered profit, on the one hand, as the result of the worker’s labor, since the value that he adds to the cost of materials is divided into two parts: payment for his labor and the profit of the entrepreneur. On the other hand, A. Smith considered profit as a result of the functioning of capital.

D. Ricardo believed that the amount of profit depends on wages: profits increase if wages decrease. One of the main factors in increasing profits is social productivity of labor, which, as it increases, leads to a decrease in the cost of labor.

According to K. Marx, profit is a transformed form of surplus value, that is, profit is a function of advanced capital. The separation of capital expenditures in the form of production costs leads to the fact that surplus value begins to represent an excess of the value (price) of a product over production costs and appears in the form of profit (p).

Many Western economists, when explaining profit, use the theory of three factors of production by J.B. Say, according to which labor, land and capital take part in the creation of value. Profit is income from the use of means of production (capital) and as payment for the work of the entrepreneur in managing and organizing production and, thus, distinguished between income on capital and entrepreneurial income.

Criticizing the theory of factors of production, K. Marx substantiated the position that new value is created by living labor. However, labor productivity depends on the technological equipment of production, fertility, location of land, etc. Consequently, capital and land contribute to the creation of greater value.

Since there were no truly market relations in the former USSR, the attitude towards profit was corresponding. It was believed that it could be established by adjusting prices and tariffs. Since the price was actually considered as an administrative standard, profit was also a product of rationing. Until the beginning of the 60s of the twentieth century. The prevailing idea was that it was enough to include profitability in the price, as the ratio of profit to cost at the level of 4-5%, and pricing was carried out in practice accordingly. In the 60s, profitability of up to 15% began to be included in the centralized price.

In a modern market economy, profit and the rate of return are the main guideline and at the same time an indicator of the state of production, a criterion of its efficiency. The rate of profit shows the efficiency of using all capital and the degree of its increase. In modern conditions, the annual profit rate of industrial corporations in the USA is 11-13%, in Western Europe - 8-10%.

Profit– this is the difference between the amount of sales (gross revenue) from the sale of products and the total cost of production.

P = C – S/S or (10.8)

р = W–K (10.9)

Enterprise profit– this is the difference between monetary proceeds (wholesale price of the enterprise) from the sale of products (works, services) (C) and their full cost (C/C).

The profit of an enterprise received from the sale of products (works, services) and adjusted depending on other income (+) and losses (-) is called balance sheet profit.

P B = C – S/S (10.10)

Since January 1, 1991, in Ukraine, not marketable products, but sold products have been used as a calculation indicator. Therefore, the mass of profit from sales is determined as the difference between the volume of products sold (without turnover tax) and the full cost of products sold (production and sales costs).

Since 1993, instead of turnover tax, the value added tax and excise taxes have been used.

The part of book profit that remains after paying taxes and other payments is called net profit.

P Ch = P B – taxes, mandatory payments (10.11)

Basic ways to increase profits enterprises:

Increasing revenue from sales of products (works, services) based on increasing the production of marketable products, improving their quality and selling price.

Reducing production costs.

The balance sheet and net profit of an enterprise in general reflect the final results of business and are the main indicators of the economic and financial activities of the enterprise.

Gross income of the enterprise– the difference between revenue from sales of products (V) and the fund for compensation of spent means of production (FV):

VD P = V – PV, or (10.12)

the amount of the wage fund and balance sheet profit of the enterprise:

VD P = FZP + P B (10.13)

The totality of the wage fund and the net profit of the enterprise forms the commercial income of the enterprise, which is at its full disposal.

From the point of view of the financial capabilities of an enterprise in expanded reproduction, it is necessary to take into account the reproductive efficiency of the enterprise. The total reproduction effect is the indicator of the enterprise's gross income (VD P), and the final reproduction effect is the indicator of the net product (P P).

Thus, gross income and net profit are the sources of formation of accumulation and consumption funds, and their size, dynamics, structure of distribution and use determine the pace and efficiency of expanded reproduction of the enterprise.

Therefore, the issue of profit margin is important for an enterprise (firm), but one should distinguish between absolute and relative profit indicators.

Absolute profit value expressed by the concept of “mass of profit”. The amount of profit in itself does not mean anything, so this value should always be compared with the annual turnover of the enterprise (company) or the amount of its capital. An indicator of the dynamics of profit is also important, comparing its value in a given year with the corresponding value of previous years.

Relative profit indicator is the rate of profit (profitability), which shows the degree of return of production factors used in production.

To determine the efficiency (return on profit) of the current costs of an enterprise for the production of products (works, services), the indicator is used profit margins(PI), i.e. the ratio of book profit to the total cost of goods sold as a percentage. Its formula is as follows:

(10.14)

P B – mass of profit from sales of products (balance sheet profit),

C/C – full cost.

or

(10.15)

However, production efficiency cannot be judged only by mass and profit margin. It is necessary to take into account intensive factors influencing the movement of profits. This:

growth in labor productivity as a result of saving living and embodied labor;

cost reduction;

quality of products (work, services);

capital productivity, i.e., the efficiency of use of production assets.

Therefore, the efficiency of an enterprise is largely characterized by a general indicator - the level of profitability, which is one of the basic indicators of production efficiency at the macro and micro levels.

Profitability– this is a quantitative determination of the ratio of balance sheet profit to the average annual cost of fixed assets and standardized working capital as a percentage. In the practice of economic activity of an enterprise rate (level) of profitability determined by the formula:

(10.16)

– rate of return,

– balance sheet profit,

– average annual cost of fixed production assets,

OS N – the cost of working normalized funds.

Therefore, the rate of return shows degree of efficiency (return on profit) of the production resources used. Profitability characterizes the level of return and the degree of use of funds in the process of production and sale of products (works and services).

Basic ways to increase profitability:

cheaper elements of advanced capital;

reduction of current production costs.

Ultimately, the condition for both is the widespread use of scientific and technical progress results in production, leading to an increase in the productivity of social labor and, on this basis, a reduction in the cost of a unit of resources used in production.

In a market economy, profit is the basis for the development of an entrepreneurial company. Western economic literature proposes several theories for optimizing a company's activities, but they are not based on the principle of profit maximization. Thus, according to one theory, the goal of a company should not be to maximize profits, but to maximize sales. The company is faced with the task of achieving and maintaining a certain level of profit for as long as possible. In this case, the company will focus on the industry average rate of profit, which is the result of intra-industry competition.

The profit indicator in domestic and foreign practice has been studied for a long time. From time to time, factors arise that significantly affect the financial results of a business entity.

The rate of return should be understood as the ratio of profit to advanced capital.The indicator should be expressed as a percentage. The financial ratio under consideration reflects the efficiency of the use of funds. It is customary for financiers to call the rate of return the return on capital.

Factors that determine business performance

Frequent use of significant sources of increasing business efficiency involves the use of a set of measures that reflect the main directions of development and improvement of activities.

NextIt is worth noting the most important classification of business efficiency factors, based on determining the level of production management. These are internal and external factors, since they significantly influence the degree of efficiency of business activities.

Let us highlight in more detail three fundamental factors that directly influence the conduct of business and its economic results:

1. Equipment, so-called means of production. With high productivity, quality service and optimal workload, you can get maximum results with minimal costs.
2. Raw materials, materials and similar components. Good quality, minimal waste and low energy intensity, combined with good inventory management, should guarantee a high level of production, low defects and minimal costs.
3. Technological support of business a good sign of production intensity.

How to Determine Estimated Rate of Return

Using the initial investment as the denominator

To determine the estimated rate of profit, you must first determine the annual profit, which is found using the formula:

P=BB-OI
where P is the organization’s profit
ВВ – gross revenue
OI - total costs

Then you should determine the cost of depreciation of fixed assets using data on the cost of fixed assets.

This is done in two steps:

OS = NS - LS SI = OS/SPI
SPI – useful life

Ps = B – SI
B – revenue

The estimated rate of profit can be determined by a simple ratio:

RNP = Ps/PV

Calculate the company's average profit.

The method under consideration is based on the standard formula:

SNP=Ps/SV

Determine the average investment.

This indicator includes costs for capital investments and is calculated by the formula:

SV=(LV+LS)/2

Calculation of profit margin:

RNP=PS/SV*100

The ratio of net cost savings and initial investment, presented as a percentage, is the RNP.

It is quite easy to determine SNP; all data can be obtained in accounting reports.

How to calculate profitability?

Assessing the financial performance of a business is not possible without calculating the profitability indicator, which reflects the economic efficiency of the activity.

Several types of profitability are calculated: sales, products, assets, capital, and so on, for which there is a specific calculation procedure. Profitability ratios are often used in financial analysis and forecasting.

Existing methods for determining profitability have their own objectives and use different reporting indicators.

Profitability of core activities

This is a cost indicator that allows you to estimate the amount of profit per ruble of costs:

Rod = Profit from sales/cost.

Return on working capital

Characterizes the effectiveness of the ruble invested in working capital.

Rok = Net profit/Working capital

The higher the ratio, the more efficiently working capital is used.

Return on fixed capital

The profit received is not yet a sign of effective activity. It is necessary to calculate other financial indicators in more detail.

Rok=Net profit/Fixed capital

The ratio reflects what share of net profit falls on a unit of the company's fixed capital.

Calculation of profitability of sales

The coefficient characterizing net profit in terms of gross revenue shows financial efficiency of activities . Different profit indicators can be taken as financial results.

The normative value depends on a number of features, for example, industry affiliation.

Profitability threshold

Also called the break-even point, which characterizes the level of business activity at which the amount of costs is equal to the amount of income and helps to calculate the company’s margin of financial strength:

Pr = Pos costs/K gross margin

The gross margin ratio is calculated using the formula:

Vm = (Gross revenue - Variable costs) / Gross revenue

When planning and forecasting, many managers take this as the basis for making decisions when it is necessary to conduct business in such a way that this threshold is not exceeded.

Cost return

It shows how much money spent on a business is recouped, reflects how much profit is made per one invested ruble. Used for cost-benefit analysis.

The indicator is defined as follows:

Рз = Profit/Decapitalized expenses.

Additive ones are used when the indicator is calculated as the difference or sum of the resulting factors, multiplicative ones are used as their product, and multiples are used when the factors are divided into each other to obtain the result.

The use of these models leads to combined or mixed models. For a complete factor analysis of profitability, multifactor models are used, which include different profitability ratios.

Net profit

Net profit is a rather complex economic category. The best minds of our time, both domestic and foreign, are studying it.

The company's management has a high responsibility for managing the enterprise in such a way that the business generates maximum profit. Because owners always want to receive dividends.

Thus, management is faced with the important task of managing income and expenses in such a way that there are more of the former and as little of the latter as possible. Considering that when calculating net profit, all direct, variable and indirect costs are taken into account

The net profit of an enterprise should be understood as the share of gross revenue, minus the costs of paying wages and tax payments.

Making a profit is the main goal of a commercial organization.

Generating profit is a rather complex process; only a few owners have the necessary skills and ability to make the right management decisions.

Theoretically, profit is a component of the company that remains at the disposal of the owners, which can then be distributed at their discretion. Net profit indicators are incredibly important for every enterprise, because investors are more focused on them.

Calculation of net profit

Determining net profit is quite simple. First you need to determine the period for which calculations will be made.

Net profit is found by the formula:

PE = Financial profit + Gross profit + Other profit - Mandatory tax payments.

Distribution of net profit

The main legislative framework regulating the distribution of net profit is the Federal Law “On Limited Liability Companies”.

An organization can distribute profits quarterly, once every six months or annually. The decision is made at the general meeting of participants. Net profit, as we found out, is the financial result of the company.

Business owners can distribute it for the following purposes:

• dividend payment
• business financing in the form of investments in fixed or working capital
• reserve capital and beyond

In addition, joint stock companies that issue shares and trade them on the stock exchange are interested in paying dividends, since this is the main indicator that investors focus on when investing their capital.

Experienced owners understand when to make a profit and when to invest. While the business has room to grow and develop, it will not be advisable to withdraw capital when it can be advanced.

Therefore, studying the market, competitors and development prospects provides certain data on the stages of activity and the possible achievement of maximum production volumes.

At this point, the company will no longer be able to actively and dynamically develop, but will enter a phase of stagnation and then the net profit should be withdrawn in the form of dividends.

Profit is distributed among participants in proportion to their shares. It can also be directed by the enterprise to any necessary purposes. Recently, it has become common to use profits for charity.

Formation of net profit

The volume of net profit of the reporting period does not provide complete information, due to the fact that not all income and expenses are taken into account. In turn, this line of reporting characterizes the activity quite indicatively.

There is net profitmain indicator , characterizing the activities of an economic entity. This indicator is of interest to creditors for the purpose of studying creditworthiness, counterparties to determine reliability and shareholders to calculate efficiency.

To understand the success of an enterprise, one of the main criteria is the amount of profit. In general terms, profit is the difference between the funds received from sales and the costs of the enterprise. There is a concept of profit margin, the calculation formula and economic essence of which will be discussed below.

The concept of rate of return

The Decree of the Government of the Russian Federation dated June 25, 2003 No. 367 “On approval of the Rules for conducting financial analysis by arbitration managers” defines the rate of net profit as the ratio of the amount of net profit to the amount of revenue excluding value added tax and excise taxes included in the sales price of goods or services of an enterprise .

The profit margin shows how many kopecks of profit are generated for each ruble of revenue. This indicator allows you to assess how effective the ratio of the enterprise’s costs and funds received from sales is.

Formula for calculating rate of return

Profit margin = Net profit / Revenue

The numerator contains the net profit indicator, which is the final indicator of the profitability of the enterprise, cleared of all possible expenses.

Using the lines of Form 2 “Profit and Loss Statement”, the formula is calculated as:

Net profit = Profit (loss) before tax - Current income tax - Change in deferred tax liabilities - Change in deferred tax assets - Other

The denominator is the revenue indicator, which reflects the amount of revenue received by the enterprise from the sale of goods and services in a given reporting period, minus value added tax and excise taxes. In Form 2 “Profit and Loss Statement” this indicator is reflected in line 2110 “Revenue”.

Application of rate of return

The profit margin is applied by the company's management for:

• tracking the dynamics of business profitability when the indicator is compared with previous periods;
• comparing the performance of branches, divisions or subsidiaries of the company for the purpose of analyzing the effectiveness of a particular asset and subsequent decisions on transforming the structure of the asset portfolio;
• benchmark with other enterprises in the industry, if the average rate of profit for similar companies is known, which allows you to maintain or achieve competitive advantages in price at low costs;
• The expected rate of return is used to decide whether to launch or abandon an investment project or when choosing from several investment projects, when preference is given to the investment with the highest rate of return.

Factors influencing the rate of profit

The rate of return is formed by the ratio of two profitability indicators; accordingly, factors influencing the numerator and denominator also affect the final value.

The numerator, revenue, depends on sales volume in natural units of measurement and on the selling price of the company's goods or services. At the same time, the company's pricing policy, established rules for payments - with deferments, advance payments, and so on - also influence sales volume.

Net profit depends both on price and sales volume, and on all costs incurred by the enterprise in the process of business activities, both production and those associated with other supporting processes in the company.

Thus, a company can sell large volumes of products at prices that are acceptable to it, but if the cost is very high and other costs are also higher than their acceptable level, then the entire effect of large sales will be offset by ineffective production and management processes.

No one does business at a loss. Even the sale of seeds brings a certain profit to the seller. But here it’s easy to figure out what it will be and where to use it. At enterprises, profit issues are more difficult to resolve - first you need to find funds, invest them, sell goods, pay off debts, and get a net profit. How is profit margin calculated in production? Let's try to figure it all out.

Profit and expenses in production

In any field of activity, and especially in production, profit and expenses are considered important concepts. These are the main economic indicators that directly form the reason and financial features of the enterprise’s activities. In order for an enterprise to ultimately form a net profit rate, it is always necessary to incur expenses. The important point is that expenses do not exceed income, otherwise the organization’s activities are meaningless. Therefore, expenses must be distributed correctly. But profit depends on how correctly employees distribute these costs and in what direction they will be directed.

Profit Rate: Definition

Having understood some concepts, it will become easier to understand the features of production economics. Thus, the rate of profit is the percentage ratio between the profit for a certain period to the capital advanced before its start. In other words, this indicator reflects the increase in capital that was invested at the beginning of the reporting period. The funds advanced, in turn, include wages to workers and production costs. The main thing in this definition is the mass of profit.

What influences profit dynamics?

The rate of profit, like any other economic indicator, depends on many factors. One of the factors influencing its dynamics is the market price and the market macroeconomic state. And, of course, the rate of net profit depends on supply and demand in the market. This indicator determines the return on investment in relation to the amount of money invested.

When there is a difference between these indicators in the direction of decreasing demand for the company's products, this indicates that the profit rate is at a low level and there is a threat of loss.

Its dynamics are influenced by changes:

• capital structure, if expenses on elements of constant capital are lower, then the rate of profit becomes higher, and vice versa;
• capital turnover rate - the higher it is, the better the effect on profit; greater income comes from short-term capital turnover, as opposed to long-term capital turnover.

Factor determining the rate of profit

The main determining factors of the rate of profit are considered to be the mass of profit, the rate of capital turnover, the cost structure of the money invested, the scale of the means of production and their savings. Each of these factors has its own impact on income and its components. But the biggest impact on profitability is the weight of the profit. This is the absolute value of the profit received. The higher this indicator, the more profitable the business. This approach helps determine the right steps in the subsequent development of the business.

How can profit be expressed?

Profit can be expressed in the profitability of the enterprise. Since this indicator is very closely intertwined with the rate of profit. What does this mean? Just like profit, the real indicator can be determined at the end of the project life cycle.

The qualitative measurement of profit is the direct rate of profit, which is calculated by the ratio of surplus value to advanced capital.

The owner can calculate the income received as a percentage of the invested funds or in monetary units common in many countries. At the moment, dollars are used when receiving and calculating profits.

How is this indicator calculated?

Profit is the final result of an enterprise’s activities, which is determined by the following formula:

P=E-W total,

where "P" is profit, "B" is revenue from sales of products, "Z total." - total costs of creating a product and promoting it.

The calculation of the rate of return is determined by the ratio of net profit to total capital investment. Data is obtained as a percentage.

This allows you to determine the valuation of projects that directly require capital investment. And based on the data obtained, you can draw conclusions.

The higher the profit value indicator, the better for the enterprise, since profit can be invested in the further development of the organization’s project or the expansion of production. This will have a positive impact on the company’s activities and increased income in the future. Based on profit indicators, one can judge the feasibility of investing funds in the company. The value of this indicator speeds up the decision-making process.

Two ways for an enterprise to generate income

The internal rate of return is the type of return that occurs when investments and cash flows from investments are equal. In this case, the company will receive income in two ways:

• investments of capital at IRR (%) in any monetary instruments;
• investments of capital that produce cash flow, in this case all components of this flow are invested at IRR (%).

IRR in this case plays the role of a barrier. For an investor, this is a very important indicator, because after studying it, he sees whether to develop the project or reject it. If the cost of the invested funds is higher than the value of this indicator, then the project will be unprofitable and should be rejected.

IRR is the ratio of the cost of capital raised and the benefits of the project, taking into account the funds spent. The most favorable value of this indicator is achieved by reducing the time between discount rates.

How is the average rate of profit determined?

There is a natural mechanism for the formation of the average rate of profit. This value is no longer determined specifically by the market; it is formed by owners (capitalists) and investors. Here the leading role is played by the emergence of competition, which we will discuss below.

In general, the process of formation of the average rate of profit is that capitalists, seeing a fairly high profit received by the company, strive to earn more money in production. For this reason, more favorable sales conditions are being developed. Investors also seek to pour their capital into an industry that will generate profits. Intra-industry competition arises as more homogeneous industries appear. But inter-industry competition may also arise, which also determines the formation of the average rate of profit.

The influence of competition on this indicator

The average rate of profit is affected by two types of competition: inter-industry and intra-industry.

Intra-industry competition is rivalry in one industry where homogeneous goods are produced. Here all efforts and resources are directed to the production of this product. In this case, its cost increases. In the market, product competition is determined not by individual, but by equal social value. And its magnitude is determined by average indicators. As a result, the enterprise's profit margin may tend to decline, which has a negative impact on the overall operation. To avoid such a phenomenon, capitalists strive to introduce new technologies that facilitate a rapid production process with minimal costs and try to match market prices without losses.

Inter-industry competition is competition between the capitalists themselves from different industries, where profits and profit rates are at a higher level. Since capital is poured into various industries, they have different structures. As is known, surplus value is created only by attracting hired workers; less capital accounts for the corresponding mass of surplus value. And in enterprises with a high organic composition of capital, the surplus value will be less. The emergence of this type of competition leads to a transfer of funds from one industry to another. The movement of capital leads to a decrease in surplus value in an industry with a low structure, an increase in the production of goods, a fall in the market price, and a reduction in the industry mass. As a result of the transfusion, the average rate of profit is equalized, which is determined by the formula: P΄ cp =Ʃ m:Ʃ (C+V) × 100%,

Where Ʃm- the total surplus value that is created in different industries;

Ʃ (C+V)- total capital advanced into various industries.

As a result, the company receives an average profit for all industries.