Analysis of the effectiveness of the organization is impossible without taking into account profitability indicators. An indicator characterizing the profitability of an activity or, in another way, economic efficiency - this is the concept of profitability.

This parameter demonstrates how efficiently the company uses the available economic, labor, monetary and natural resources.

For non-profit structures, profitability is the main indicator of work efficiency, and in commercial divisions quantitative characteristics are important, calculated with greater accuracy.

Therefore, there are many types of profitability: profitability of production, profitability of products, return on assets, etc.

It is impossible to answer unequivocally the question of how to calculate profitability, since there are formulas for each type.

But, in general terms, these indicators can be compared with indicators of efficiency, the ratio between the costs incurred and the resulting profit (the ratio of expenses to income). A business that generates profit based on the results of reporting periods is profitable.

Profitability indicators are necessary for the implementation of financial analysis of activities, identifying its weaknesses, planning and implementation of measures to increase production efficiency.

Types of profitability are divided into those based on the cost approach, the resource approach or the approach characterizing the profitability of sales.

Different types of profitability calculation pursue their own tasks and use many different accounting indicators (net profit, cost of production, business or management expenses, profit from sales, etc.).

## Profitability of the main activity.

Refers to cost indicators, characterizes the effectiveness of not only the core business of the company, but also work related to the sale of products. Allows you to evaluate the amount of profit received per 1 ruble spent.

This takes into account the costs associated with the direct production and sale of core products.

It is calculated as the ratio between the profit from sales and the sum of the cost of production, which includes:

- the cost of goods, works, products or services sold,
- cost of selling expenses,
- cost of management expenses.

It characterizes the organization’s ability to independently cover expenses with profit. The calculation of the profitability of the enterprise is used to assess the effectiveness of its work and is calculated by the formula:

**Genus = Prp / W,**

**Where З - costs, and Пп - profit received from sales.**

The calculations do not take into account the time elapsed between production and sales.

## Return on current assets.

The profitability of current (otherwise - mobile, current) assets shows the profit received by the organization from each ruble invested in current assets and reflects the efficiency of use of these assets.

It is defined as the ratio between net profit (i.e. remaining after tax) and current assets. This indicator is intended to reflect the organization’s ability to provide a sufficient amount of profit in relation to the working capital used.

The higher this value, the working capital is used more efficiently.

**It is calculated by the formula:**

**Rotch = Chn / Oa, where**

**Rosch - the general profitability, net profit - Private enterprise, and Oa - the value of current assets.**

## Internal rate of return.

The criterion used to calculate investment performance. This indicator allows you to evaluate the feasibility of investing in investment projects and demonstrates a certain discount rate at which the net cost of funds expected in the future will be zero.

This refers to the minimum rate of return when the investment project under study assumes that the desired minimum rate of return or the cost of capital of the company will exceed a lower rate of internal profitability.

This method of calculation is not very simple and involves careful calculations. In this case, inaccuracies made during the calculation can lead to final incorrect results.

In addition, when considering investment projects, other factors are taken into account, for example, gross margin. But it is precisely on the basis of calculating the internal rate of return that an enterprise makes investment decisions.

## Return on fixed assets.

The presence of profit, as an absolute indicator, does not always provide a complete picture of the effectiveness of the enterprise. For more accurate conclusions, relative indicators are analyzed that show the effectiveness of specific resources.

The process of work of some enterprises depends on certain fixed assets, therefore, to increase the overall performance, it is necessary to calculate the profitability of fixed assets.

**The calculation is carried out according to the formula:**

**Ros = Chp / Os, where**

**Ros - the profitability of fixed assets, PP - net profit, OS - the value of fixed assets.**

This indicator allows you to get an idea of how much of the net profit falls on the unit value of fixed assets of the organization.

## Calculation of profitability of sales.

The indicator reflecting net profit in total revenue, demonstrates the financial performance. The financial result in the calculations may be various indicators of profit, this leads to the existence of several variations of the indicator. Most often it is: profitability of sales by gross profit, by net profit and operational profitability.

what is the sales profitability formula. Find the answer in this article.

You will learn how to calculate the profitability formula here: https://www.russtartup.ru/kak-sozdat-svoj-biznes/buhgalteriya-2/formula-rentabelnosti-vse-chto-nuzhno-znat.html

How to determine the formula for profitability of production can be found in the article >>

## Formulas for calculating the profitability of sales.

By gross profit: Rpvp = VP / V, where VP is gross profit and B is revenue.

Gross profit is the difference between revenue from sales and cost of sales.

By net profit: Рпп = Чп / В, where Чп - net profit, and В - revenue.

Operating profitability: Op = EBIT / B, where EBIT is the profit calculated before taxes and deductions, and B is the revenue.

The optimal value of sales profitability depends on industry and other features of the enterprise.

So in organizations using a long production cycle, such profitability will be higher than those companies that operate with high turnover, although their efficiency may be the same.

The effectiveness of sales can also show the profitability of products sold, although it takes into account other factors.

## Calculation and Analysis Example

The Shoe company releases monthly 500 pairs of sandals. The cost price of one pair is 100 rubles, the rent of premises is 12,000 rubles per month, the salary of staff is 50,000 rubles per month, the cost of servicing production facilities is 20,000 rubles, the price of one sandal is 300 rubles. Sales in January amounted to 100 units, in February 50 units, in March 200 units, in April 250 units, in May 500 units, in June 1,000 units, in July 2,000 units, in August 1,500 units, in September 900 units, for October 300 units, for November 100 units, for December 50 units. It is necessary to calculate the profitability of sales by net profit for January, July and for the year.

We compile a table for the months of sales, production, expenses and profits (table 1).

**Table 1**. Calculation Data

In order to calculate the profitability of sales, we need revenue and profit, in our case, revenue (B) will be equal to:

B = Sales × Price

Net income is calculated as the difference between gross profit (VP) and the costs and income tax incurred. In our case, for simplicity, the calculation is made without income tax.

To begin with, we find the gross profit, which is calculated as the difference between the revenue for the reporting period and the cost of production (read more about it).

Vp = V - C / S × Number of products

So, net profit margin for sales in January will be -93%, for July 72% and for the year 44%. If we were considering the profitability for January, we would argue that the business is unprofitable and it is necessary to close it. If July were taken as the basis, they would say that a profitable business needs to be produced more. Both conclusions are wrong. If we look at the profitability for the year, we will see that the business is profitable. As it became clear to analyze and draw conclusions on the profitability of sales for only one reporting period is wrong.

Calculating the profitability of sales by net profit for January, we got a negative result, which suggests that the production of sandals in January is unprofitable. And this is logical, since it is a seasonal product. In the fall / winter period, few will buy them, so the seasonal factor affected the profitability of sales. There may be several such factors.

## Profitability threshold.

It has other names: a critical volume of production or sales, a critical point, a breakeven point. Indicates a level of business activity of the organization at which total costs and total revenues are equal to each other. Allows you to determine the stock of financial strength of the organization.

**The following formula is calculated:**

**Pr = Zn / Kvm, where**

**Pr - the threshold of profitability, Зп - fixed costs, and Kvm - gross margin ratio.**

**In turn, the gross margin ratio is calculated by another formula:**

**Вм = В - Зпр, where Вм - gross margin, В - revenue, and Зпр - variable costs,**

**Kvm = Vm / V.**

The company incurs losses when the sales volume is below the profitability threshold and makes a profit if this indicator is above the threshold. It is worth noting that with an increase in sales, fixed costs per unit of output decrease, while the variables remain the same. The threshold of profitability can be calculated for certain types of services or products.

## What factors affect net return on sales?

Consider the factors affecting return on sales in more detail. Factors can be divided into internal and external.

The internal ones include:

- staff costs
- cost price,
- Selling price,
- storage costs of products
- communal payments,
- product quality.

That is, the company can influence these factors by making a management decision. For example, increasing the level of product quality can have a positive effect, because demand is stimulated. But the effect may also be negative, since production costs will increase due to higher product quality, and demand will not increase.

External factors include factors that the organization cannot influence in any way. For example, a competitor has released a model in terms of characteristics and design better, the competitor’s demand for a model has increased, as a result, our sales are falling, profitability is decreasing. Or the introduction of excise taxes on leather products by the state.

Since external factors cannot be controlled, their analysis is more based on obtaining external information (tracking competitors, changing the market, fiscal policy, etc.).

## Return on cost.

It characterizes the return on investment spent on production, shows the profit received from each ruble invested in the production and sale. Used to evaluate the effectiveness of spending.

It is calculated as the ratio between the amount of profit and the sum of expenses that brought this profit. Such expenses are deemed to be capitalized, deducted from the balance sheet asset presented in the report.

**Cost-effectiveness indicator is calculated as follows:**

**Рз = П / Др, where П - profit, and Др - decapitalized expenses.**

It should be noted that the calculation of cost-effectiveness indicators demonstrates only the degree of recoupment of expenses spent on specific areas, but does not reflect the return on invested resources. This task is performed by indicators of return on assets.

## Profitability factor analysis.

It is one of the parts of financial analysis and, in turn, is divided into several models, of which additive, multiplicative and multiple are most often used.

The essence of constructing such models is the creation of a mathematical relationship between all the factors studied.

Additives are used in cases where the indicator will be obtained as the difference or the sum of the resulting factors, multiplicative - as their product, and multiple - when the factors are divided into one another to obtain the result.

Combinations of these models give combined or mixed models. For a full factorial analysis of profitability, multivariate models are created in which various indicators of profitability are used.

## Profitability - the purpose of calculation

The ultimate goal of any commercial company is profit, that is, the positive difference between the income earned and the expenses incurred. Profit is an absolute financial indicator. Having counted it, we can see that for a certain period our incomes covered expenses. However, he still does not allow to evaluate the effectiveness of the activity.

For example, take 2 companies of the same industry - one large, with high turnover, the other small. Suppose that both firms worked for profit in a year. For a large enterprise, profit in absolute terms can significantly exceed the financial result obtained by a small one. However, this does not mean that it works more efficiently. Indeed, large profits can be achieved due to the scale of activity, and not due to competent business, that is, due to quantity, not quality. And this is far from the best option.

Meanwhile, simply on the basis of profit information, we cannot evaluate the activities of such different companies, since the figures are not comparable. And here profitability comes to our aid.

## Profitability of the enterprise: calculation formula

Profitability is a relative indicator of profitability, the ratio of profit to that indicator, the return on which is required to be known. If you explain “on the fingers”, then profitability shows us how much profit each organization invested in it and spent by it makes a profit.

In general form for **profitability calculation formula** looks like that:

X is an indicator whose profitability we consider.

These indicators will be discussed later.

Profitability is expressed as a percentage, so the result of the division must be multiplied by 100.

## Types of profitability

The calculation of profitability is multidimensional. You can calculate the profitability of almost everything: any resources, sources of their acquisition, costs. We will focus on the calculation of the main types of profitability. They are as follows:

This type of profitability is intended to show how much profit each ruble that the company has invested in property returns. To calculate it, profit is correlated with assets. **Profitability Formula** in this area will be as follows:

R_{Act} - return on assets,

P_{R} - profit (as a rule, they take either net profit or profit from sales, depending on the purposes of the calculation),

BUT_{to} - the average value of the organization’s assets for the billing period

As well as return on sales, return on assets is detailed. You can calculate the profitability of total, non-current or current assets. If necessary, you can even determine the profitability of certain types of property, for example, fixed assets.

*The features of calculating the return on assets can be found in the article.**“We determine the return on assets (balance sheet formula)”**.*

For example, return on equity may be of interest to company owners. It provides information on whether investments work effectively.

View **profitability formulas** here will be like this:

R_{ck} - return on equity,

P_{R} - net profit (return on equity is considered only by net profit),

FROM_{TO} - the average value of equity for the billing period.

In a similar manner, you can calculate the profitability of borrowed capital:

R_{zk} - return on equity,

P_{R} - net profit,

D_{ABOUT} - long term duties,

TO_{ABOUT} - short-term liabilities of the organization.

This indicator will show the yield on each ruble of borrowing.

- Return on sales or overall profitability.

This is the ratio of profit to sales, which shows how many cents of profit "sits" in each ruble of revenue. **Profitability formula** The sales are as follows:

R_{prod} - return on sales,

ABOUT_{P} - sales volume (revenue).

Everyone knows that profit is also divided into types (gross, operating, net, etc.). For profitability of sales, you can use each of them depending on what you need to know.

*Read more about the nuances of calculating sales profitability in the article.**"The formula for calculating the profitability of sales by balance"**.*

This is also a very important indicator of profitability, which speaks of cost-effectiveness, shows the share of profit in each ruble spent on production. **Profitability formula** in this case, is the ratio of profit to cost:

R_{etc} — рентабельность продукции,

С учетом целей анализа эту рентабельность продукции рассчитывают:

- по чистой прибыли или по прибыли от продаж,
- at the full cost of production or only at production cost.

## Profitability of “tax” value - is this possible?

So, we found out that by profitability it is possible to judge the effectiveness of the company. From here follows the circle of people to whom this indicator may be useful. Obviously, these include:

- company owners who need to know how their money works,
- managers, because they are responsible for the work of the company, including to the owners,
- potential investors - it’s worth understanding where you are investing,
- analysts, economists, financiers - they work with numbers, make forecasts, look for growth reserves, struggle with inefficient use of resources.

At first glance, that's all. Meanwhile, tax authorities should also be included in the circle of those interested. Yes, inspections are also interesting for your profitability, namely, indicators of profitability of products and assets. They monitor the average profitability by industry - data from 2006 to 2014 can be found in Appendix No. 4 to Order No. MM-3-06 / 333 @ of the Federal Tax Service of Russia dated May 30, 2007 (information is updated annually). And compare with them your profitability. A deviation of more than 10% may be a signal for the company to be included in the field inspection plan (see the 11th of the generally available criteria for taxpayers to independently assess the risks of a tax audit). And this means that paying attention to profitability is also necessary for employees of accounting and tax services of organizations.

## Where can I get data to calculate the profitability of the company?

We know that in order to calculate the profitability of an activity, the formula must contain information about the company's profit, revenue, assets, capital and borrowings. All this information can be obtained from the financial statements: the balance sheet and the statement of financial results.

But on their basis it is possible to calculate only sufficiently aggregated, general indicators. A more detailed and in-depth analysis requires more detailed information. For example, to calculate the profitability of a particular type of product, you need the figures of profit and cost of a particular product, the profitability of sales can be calculated not by the organization as a whole, but by the type of activity, and for this you need to know the amount of revenue and profit in the particular line of business that interests us. Which means to count **profitability of the enterprise, formula** must be supplemented with data from accounting analytics or management accounting.

Unprofitable - means unprofitable. This is known to everyone. But not everyone knows what profitability can specifically say. Using the above **profitability formulas**, you can easily calculate its level of organization and find out if your company is effective or not. And accountants, we strongly recommend paying attention to the profitability of products and assets. Suddenly, it will save you from the excessive attention of the tax authorities?