N.V. Klimov
Doctor of Economic Sciences,
Professor, Head of the Department of Economic Analysis and Taxes,
Academy of Marketing and Social Information Technologies,
Krasnodar city
Economic Analysis: Theory and Practice
20 (227) – 2011

A methodology for calculating profitability indicators is proposed, a factor analysis of profitability according to the Du Pont model and profitability of sales, including for certain types of goods, is disclosed, examples of assessing the impact of tax factors on profitability of capital are given, patterns of growth in profitability indicators are listed, and proposals for their increase are given.

Profitability reflects the economic efficiency of the organization, it shows the ratio of results to costs. To calculate the level of profitability, the values ​​of indicators of profit, costs, revenue, assets, and capital are required.

There are a lot of profitability indicators, they can be calculated in relation to any type of resource. For example, the profitability of the use of material resources is determined by dividing profit before tax by the cost of material resources.

The profitability of the use of working capital is calculated by dividing the profit before tax by the amount of current assets. Or if you try on the reduction method (divide the numerator and denominator by revenue), then you can use the following factorial model: multiply the profitability of sales by the turnover ratio of current assets. Profit from the sale, multiplied by the turnover ratio of all assets, forms an indicator of the return on assets.

The profitability of using fixed assets is determined by dividing profit before tax by the average annual cost of fixed assets, and the result is multiplied by 100%. If the numerator and denominator are divided by revenue, then the factor model will look like the ratio of return on sales to capital intensity.

The profitability of the functioning of the organization is calculated by dividing the profit before tax or the amount of net profit by the total cost (cost in conjunction with commercial and administrative expenses), the result is multiplied by 100%.

The calculated value shows how much profit before tax the company has from each ruble spent on the production and sale of products.

А/К - equity multiplier;

В/А - asset turnover;

P h / V - net margin.

Factor analysis algorithm:

1) increase in return on equity due to the equity multiplier:

where ΔФ is the growth of the multiplier in absolute terms;

Ф 0 - the value of the multiplier in the previous (base) period;

R 0 - return on equity in the previous (base) period;

2) increase in profitability due to turnover:

where Δk is the increase in turnover in absolute terms;

k 0 - turnover in the previous (base) period;

3) Increase in profitability due to net margin:

where ΔM - margin growth in absolute terms;

M 0 - margin in the previous (base) period.

The figure shows a scheme of factor analysis of profitability, in which the indicators characterizing each direction of the organization's activity are organically linked.

The Du Pont methodology allows for a comprehensive assessment of the main factors affecting the performance of an organization, assessed through the return on equity, namely such factors as the equity multiplier, business activity and profit margin. The strategy of increasing profitability due to the above three factors is closely related to the specifics of the organization's activities. Therefore, in the process of analyzing the effectiveness of managing an organization, it is necessary to assess the adequacy of the strategy applied by management to external and internal factors in the functioning of the organization.

Due to the margin, an organization that produces high-quality products for a segment characterized by fairly high incomes and low price elasticity of demand for price can increase profitability. At the same time, it is obvious that the share of fixed costs should be quite low, since a high margin is usually accompanied by a low volume of production and sales. In addition, since high margins are always an incentive for competitors to enter the market, the strategy of increasing the return on equity through margin is applicable when the market is sufficiently protected from potential producers.

If the direction of increasing the return on equity is asset turnover, then the serviced market segment should be characterized by high price elasticity of demand and low incomes of potential buyers, i.e. in this case we are talking about the mass market. Therefore, the production capacity must be sufficient to meet the demand.

Increase the return on equity due to the multiplier, i.e. by increasing liabilities is possible only if, firstly, the profitability of the organization's assets exceeds the cost of attracted liabilities and, secondly, non-current assets occupy a small share in the structure of its assets, which allows the organization to have a significant share in the structure of funding sources. weight of intermittent sources.

For factorial analysis of the margin (profitability of sales), you can use the following model:

where k pr is the coefficient of production costs (the ratio of the cost of goods sold to revenue);

k y - coefficient of management costs (the ratio of management costs to revenue);

k to - the coefficient of commercial costs (the ratio of commercial costs to revenue).

In the process of interpreting the obtained values ​​and analyzing their dynamics, it should be taken into account that an increase in the production cost ratio indicates a decrease in efficiency in the production sector due to an increase in the resource intensity of products, and which resources are used less efficiently, shows the analysis of the dependence of the margin on resource intensity indicators:

where ME - material consumption (the ratio of costs for raw materials and materials to revenue);

ZE - wage intensity (the ratio of labor costs with deductions to revenue);

AE - depreciation intensity (the ratio of the amount of depreciation to revenue);

PE pr - resource intensity for other costs (the ratio of the value of other costs to revenue).

An increase in the coefficient of management costs indicates a relative rise in the cost of the management function of organizations, the limit value is 0.1-0.15. At the same time, there is the following pattern: the share of management costs in revenue at the stage of growth and development decreases, at the stage of maturity it stabilizes, and at the final phase of the decline it increases. An increase in the commercial cost ratio indicates a relative increase in marketing costs, which can be justified if it is accompanied by a noticeable increase in sales revenue, entry into new markets, promotion of new products on the market.

For a more detailed analysis, the influence of factors on the level of sales profitability for individual types of products is assessed using a factor model:

where P i - profit from the sale of the i-th product;

B i - proceeds from the sale of the i-th product;

Пi - selling price of the i-th product;

C i - the cost of the i-th product sold.

The algorithm for calculating the quantitative influence of factors on the change in the profitability of sales for certain types of goods:

1. The profitability of sales for the base (0) and reporting (1) years is determined.

2. The conditional indicator of profitability of sales is calculated.

3. The overall change in the level of sales profitability is determined

4. The change in the profitability of sales is determined by changing:

Unit prices:

Unit cost of production:

According to the results of calculations, it is possible to identify the degree and direction of the influence of factors on the profitability of sales, as well as to establish reserves for its increase.

Patterns of growth of profitability indicators:

The growth of sales profitability, subject to an increase in sales volume, indicates an increase in the competitiveness of products, and due to such factors as quality, customer service, and not the price factor;

the growth of return on assets is an indicator of increasing the efficiency of their use, in addition, the return on assets reflects the degree of creditworthiness of the organization: an organization is creditworthy if the return on its assets exceeds the percentage of attracted financial resources;

The increase in return on equity reflects an increase in the investment attractiveness of the organization: the return on equity should exceed the return on alternative investments with a comparable level of risk. It should be noted that the return on capital is the indicator that tends to equalize on the scale of the entire economy, i.e. a low value of this indicator for a long time can be considered as an indirect sign of reporting distortion;

An increase in return on invested capital reflects an increase in the ability of a business to create value, i.e. improve the welfare of owners; return on invested capital must exceed the weighted average price of the company's capital, calculated taking into account market prices for sources of financial resources. The return on capital underlies the sustainable growth of an organization, its ability to develop through internal financing.

When assessing the impact of tax factors on the return on equity, special attention should be paid to income tax. Return on equity can be calculated from both profit before tax and net income. Comparison of the growth rates of these two indicators will make it possible to give a preliminary general assessment of the influence of the tax factor.

Example 1

The amount of planned and actual profit before tax is the same and, according to accounting data, amounts to 3,500 thousand rubles. rub. Tax base for profit: according to the plan - 3,850 thousand rubles. rub., in fact -4 200 thousand. rub. Income tax rate - 20%. The average annual value of capital was unchanged and amounted to 24,600 thousand rubles. Let's evaluate the impact of income tax on the level of return on capital.

1. Income tax will be:

According to the plan: 3,850 * 0.24 = 924 thousand rubles;

In fact: 4,200 * 0.24 = 1,008 thousand rubles.

2. Net profit will be equal to:

According to the plan: 3,500 - 924 = 2,576 thousand rubles;

In fact: 3,500 - 1,008 = 2,492 thousand rubles.

3. The deviation of the actual profit from its planned value is: ΔP = 2,492 - 2,576 = - 84 thousand rubles.

4. Return on capital will be:

According to the plan: 2,576 / 24,600 100% = 10.47%;

Actual: 2,492 / (24,600 - 84) 100% = = 10.16%.

The analysis of the obtained results showed that the growth of actual profit, accepted as a tax base, in comparison with its planned value by 9.09% (4,200 / 3,850,100%) led to a decrease in return on capital by 0.31%.

Example 2

Let us evaluate the impact of reducing tax costs, which are part of the cost of goods sold, as well as commercial and administrative costs associated with their sale, for a taxpaying organization on the profitability of sales.

The tax costs of the organization amounted to 7,537 thousand rubles. rub. and decreased over the analyzed period by 563 thousand rubles.

The proceeds (net) from the sale of goods for the analyzed period for this organization is 55,351 thousand rubles. The cost of goods sold without the named taxes is 23,486 thousand rubles. rub., the amount of commercial and administrative expenses (excluding taxes) - 3 935 thousand. rub.

1. Determine the planned tax costs: 7,537 - 563 = 6,974 thousand rubles.

2. Total costs of the planning period: 23,486 + 3,935 = 27,421 thousand rubles.

3. Planned profit: 55,351 - 27,421 - 6,974 = 20,956 thousand rubles.

4. Planned return on sales: 20,956 / 55,351 * 100% = 37.86%.

5. Return on sales for the reporting period: (55,351-23,486 - 3,935 - 7,537) / 55,351,100% = 20,393/55,351,100% = 36.84%.

6. Planned increase in profitability: 37.86 -36.84 = 1.02%.

Output. As a result of a reduction in tax costs by 563 thousand rubles. return on sales will increase by 1.02%.

To increase profitability indicators, it is possible to propose a reduction in optional costs (extra office space, excess compensation packages, hospitality expenses, reduced costs for the purchase of furniture, office equipment, consumables, etc.), the development of a competent pricing policy, and differentiation of the assortment. No less important is the optimization of business processes (identifying and optimizing the company's key internal business processes in a crisis; selecting the best specialists in the labor market, optimizing staffing; tightening control over spending funds, and stopping abuses).

In a post-crisis environment, organizations need an attack strategy that cannot be replaced by long-term planning and cost-saving measures, as they will not lead to success. We need a fight to win in new markets, a special financing regime, a special marketing plan and enhanced measures to boost sales.

Bibliography

1. Bondarchuk N.V. Financial and economic analysis for the purposes of tax consulting / N.V. Bondarchuk, M.E. Gracheva, A.F. Ionova, Z. M. Karpasova, N. N. Selezneva. M.: Informburo, 2009.

2. Dontsova L.V., Nikiforova N.A. Analysis of financial statements: Textbook / L. V. Dontsova, N. A. Nikiforova. M.: DIS, 2006.

3. Melnik M. V., Kogdenko V. G. Economic analysis in audit. Moscow: Unity-Dana, 2007.

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Assessment of the impact of factors on the change in the return on equity in terms of net profit due to changes in:

Return on sales based on net profit

where, - change in return on equity due to changes in return on sales in terms of net profit;

Return on sales based on net profit for 2007 and 2005, respectively, %;

asset turnover ratio for 2005;

financial dependency ratio for 2005

Turnover of total assets

where, - change in the return on equity due to changes in the turnover of current assets;

asset turnover ratio for 2007

Financial dependency ratio

where, the change in the return on equity due to changes in the structure of sources of financing of working capital (coefficient of financial dependence);

financial dependency ratio for 2007

The total influence of factors

11+-4,2+4,2=-11% (4)

According to the factor analysis, we can conclude that the decrease in the return on equity in net profit by 11% is due almost to the decrease in return on sales by 4.6%.

where, N - sales proceeds, thousand rubles;

– average annual cost of fixed assets, thousand rubles;

- return on assets of the active part of fixed assets, rub./rub.;

– shares of the active part of fixed assets, %.

external manifestation of the financial stability of the enterprise is its solvency. It characterizes the degree of protection of the interests of creditors. An enterprise is considered solvent if its available funds, short-term financial investments and active settlements (settlements with debtors) cover its short-term obligations. analysis of solvency indicators (capital structure) of the enterprise in the reporting year is given in table 4.

Table 4. Solvency indicators of the Belgorod Khladokombinat OJSC for 2005–2007

Name of indicator	Calculation procedure	Standard value	actual value			The change
Absolute liquidity ratio
Interim liquidity ratio
Current liquidity ratio

According to the table of solvency indicators of Belgorod Khladokombinat OJSC, it can be concluded that the solvency of the enterprise in 2007 is lower than in 2006, although the values ​​of absolute and intermediate liquidity indicators are within the normative values. So the absolute liquidity of the enterprise in 2007 was 19%. This indicator is within the normative value, and means that the enterprise meets its short-term obligations with its most turnover assets by 19%. While in 2005 this indicator reached 22%. In 2007, the current liquidity ratio is below the normative value. This is due to a sharp increase in short-term liabilities of the enterprise. But, despite this, the company is responsible for its short-term liabilities with its most liquid assets.

The financial stability of an organization is characterized by the degree of protection of attracted capital, which is characterized by such indicators as the coefficient of ownership, the coefficient of maneuverability, the coefficient of concentration of borrowed capital.

Table 5 shows that the value of own working capital is negative at the beginning of 2005 -6897.5 thousand rubles, for 2006 -10312.5 thousand rubles, for 2007 -21987 thousand rubles. This means that the sources of formation of current assets are borrowed. This statement is also confirmed by the indicator of the provision of current assets with own sources. In 2007, not a single ruble was directed to the formation of current assets, therefore the indicator of the provision with own sources of current assets is negative and amounts to -17%, which is 8% more than in the previous year, when the provision of assets with own sources of formation of funds was 9 %.

3.3 Analysis of return on equity and the influence of factors on its change

Each enterprise needs to know all the information about the profitability of its activities. Such an indicator may be the profitability of the enterprise (assets).

The profitability of an enterprise (assets) is an indicator that is an important characteristic of the factor environment for the formation of an enterprise's profit.

This indicator is a mandatory element of the analysis and assessment of the financial condition of the enterprise. It is calculated as the ratio of profit (gross, operating, net) to the average annual value of the company's assets.

Where P cap - return on capital,%

PE - net profit, thousand UAH.

Average annual value of assets, thousand UAH

In the economic literature, this indicator is most often called the general, economic profitability, profitability of production or profitability of capital.

The level and dynamics of this type of profitability can be influenced by various factors of production and economic activity. The main ones include (according to Moshensky):

1) the level of organization of production and management;

2) capital structure;

3) the degree of use of production resources;

4) volume, quality and structure of products;

5) production costs and production costs;

6) profit by type of activity and direction of its use.

The return on equity ratio is of interest primarily to investors. And also for existing and potential owners and shareholders. The return on equity shows how much profit each unit of money invested by the owners of capital brings. Return on equity is calculated by the formula:

It is the main indicator used to characterize the effectiveness of investments in activities of a particular type.

In foreign practice, the concept of the threshold of profitability, or the break-even point, and the margin of financial strength of the enterprise is often used.

The threshold of profitability is usually understood as such a volume of sales proceeds at which the profit is zero, but at the same time the enterprise fully covers its costs.

In addition to this indicator, the financial strength indicator is also used, showing how much the sales proceeds exceed the profitability threshold. If this value is negative, then the enterprise is unprofitable.

In order to assess the level of return on capital of the enterprise we are considering, it is necessary to compile a table with initial information for calculating the indicator.

Tab. 3.3 Indicators for the analysis of return on equity of the enterprise CJSC "ZZHRK"

Rice. 3.3 Dynamics of return on equity of ZZHRK CJSC

As can be seen from Table. 3.3, the return on equity at ZZHRK CJSC increased significantly in 2009 compared to 2008 from 15.5% to 136% due to changes in the company's net profit. The return on equity was practically not affected by the change in the cost of capital. But, due to the fact that the profit factor had a greater impact on the profitability indicator than the change in the amount of capital, this resulted in an increase in the total return on capital, which means the fact that the company rationally organized its activities and responded well to changes taking place in the market .

Return on equity increased from 7.3% to 81.9%. The indicator of own capital indicates that each hryvnia invested by the owners of capital brought a profit of 7.3 kopecks. in 2008, and 81.9 kopecks. in 2009.

In order to increase the level of return on capital in the future, the company needs to carefully consider all planned indicators for the next year and improve its trade policy in order to quickly respond to all external changes in the structure of the goods market.

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In the article we will analyze one of the key indicators of the company's financial stability - return on equity. It is used both to assess the financial condition of a business and investment projects.

(EnglishROE, Return on Shareholders’ Equity) is an indicator characterizing the profitability of the company's own capital. The return on equity shows the effectiveness of managing the management of an enterprise with its own funds and directly determines the investment attractiveness for investors and creditors. The higher the profitability, the higher the return on equity.

This ratio is used by investors for a comparative assessment of various investment projects and investment options, comparing the return on equity with alternative investments: stocks, bank deposits, futures, indices, etc. If the return on equity exceeds the minimum set level of return for the investor, then the company becomes investment attractive. The minimum acceptable level may be the return on a risk-free asset. In practice, government securities, which have the maximum level of reliability, are taken as a risk-free asset. In Russia, such securities include government corporate bonds (GKO) and federal loan bonds (OFZ).

The formula for calculating the return on equity of a business

The data for calculating the return on equity are taken from the balance sheet (Equity) and the income statement (Net profit). The calculation of the coefficient is the ratio of the net profit of the enterprise to the amount of own funds.

To obtain a more accurate value of the indicator, the average values ​​of net profit and equity are used, which are calculated as the arithmetic mean at the beginning and end of the year.

The calculation of return on equity for a period other than a year uses the following modification of the formula:

One of the approaches to calculating the return on equity is to evaluate the indicator based on . This model represents a three-factor analysis of the main parameters that form the return on equity.

ROS ( Return on Sales) - profitability of sales of the enterprise;

TAT ( Totalassetsturnover) – ;

LR ( Leverage Ratio) is financial leverage.

An example of calculating the return on equity ratio

Analysis of the return on equity

The higher the value of the return on equity, the higher the profitability and efficiency of managing the enterprise's management only with its own capital. Since this indicator is used in the evaluation of investment projects by strategic investors, its value is compared with the profitability of alternative investments or. It is advisable to use the coefficient for evaluation only if the company has its own capital, in other words, positive net assets. Otherwise, the indicator is not relevant for the analysis.

Summary

The indicator of return on equity is the most important coefficient for assessing the financial condition of an enterprise and the level of investment attractiveness and is actively used by managers, owners and investors to diagnose the financial condition.

Definition

Return on equity(return on equity, ROE) - an indicator of net profit in comparison with the equity of the organization. This is the most important financial indicator of return for any investor, business owner, showing how efficiently the capital invested in the business was used. Unlike a similar indicator of "assets", this indicator characterizes the efficiency of using not the entire capital (or assets) of the organization, but only that part of it that belongs to the owners of the enterprise.

Calculation (formula)

Return on equity is calculated by dividing net income (usually for the year) by the equity of the organization:

Return on Equity = Net Income / Equity

To get the result as a percentage, this ratio is often multiplied by 100.

A more accurate calculation involves using the arithmetic average of equity for the period for which net profit is taken (usually for a year) - equity at the beginning of the period is added to equity at the end of the period and divided by 2.

The net profit of the organization is taken according to the "Profit and Loss Statement", equity - according to the liabilities of the Balance.

Return on Equity = Net Profit*(365/Number of days in the period)/((Equity at the beginning of the period + Equity at the end of the period)/2)

A special approach to calculating the return on equity is the use of the Dupont formula. Dupont's formula breaks the indicator into three components, or factors, allowing you to better understand the result:

Return on equity (Dupon formula) = (Net income / Revenue) * (Revenue / Assets) * (Assets / Equity) = Net profit margin * Asset turnover * Financial leverage.

Normal value

According to average statistics, the return on equity is approximately 10-12% (in the US and the UK). For inflationary economies, such as Russia, the figure should be higher. The main comparative criterion in the analysis of the return on equity is the percentage of alternative returns that the owner could receive by investing his money in another business. For example, if a bank deposit can bring 10% per annum, and a business brings only 5%, then the question may arise about the advisability of further conducting such a business.

The higher the return on equity, the better. However, as can be seen from the Dupont formula, a high value of the indicator may result from too high financial leverage, i.e. a large share of borrowed capital and a small share of own capital, which negatively affects the financial stability of the organization. This reflects the main law of business - more profit, more risk.

The calculation of the return on equity ratio makes sense only if the organization has equity capital (i.e. positive). Otherwise, the calculation gives a negative value, which is of little use for analysis.