Profitability equity is one of the most important indicators of business performance. Any investor, before investing his finances in an enterprise, analyzes this parameter. It shows how competently the assets belonging to the owners and investors are used.

An example of the equity formula in Excel can be downloaded.

The return on equity ratio reflects the value of the ratio of net profit to the company's own funds. It is clear that such a calculation makes sense when the organization has positive assets that are not burdened with borrowing restrictions.

Assessment of return on equity

The following indicators affect the return on equity:

• operational efficiency ( net profit from implementation);
• return of all assets of the organization;
• the ratio of own and borrowed funds.

How to evaluate the return of a business by looking at the profitability ratio?

1. Compare it with alternative returns. How much will a businessman get if he invests his money in another business? For example, he will attribute the funds to a bank deposit, which will bring 10% per annum. And the profitability ratio of the existing enterprise is only 5%. It is clear that it is inexpedient to develop such a company.
2. Compare the indicator with the norms that have historically developed in the region. Thus, the average profitability of companies in England and the US is 10-12%. In countries with stable economies, a coefficient in the range of 12-15% is desirable. For Russia - 20%. In each specific state, the values ​​of the indicator are influenced by many factors (inflation, industrial development, macroeconomic risks, etc.).
3. High profitability does not always mean high financial results. The higher the ratio, the better. But only when a large proportion of investments are the company's own funds. If borrowed funds predominate, the organization's solvency is at risk.

Thus, a huge debt burden is dangerous for financial stability firms. Calculating the return on equity is useful if the company has this very capital. The predominance of borrowed funds in the calculation gives a negative indicator, which is practically not suitable for analyzing the return on business.

Although it is impossible to be categorical about the profitability ratio. Its use in analysis has some limitations. The real income of the owner or investor does not depend on assets, but on operational efficiency (sales). Based on a single indicator of return on own capital investments, it is difficult to assess the productivity of a firm.

Most companies are heavily leveraged. The same banks exist only on borrowed funds (attracted deposits). And their net assets serve only as a guarantor of financial stability.

Whatever it was, but the profitability ratio illustrates the company's income earned for investors and owners.

How to calculate the return on equity?

The company's return on equity shows the amount of profit that the company will receive per unit of cost. own funds. For potential investor the value of this indicator determining:

1. The profitability ratio gives an idea of ​​how wisely the invested capital was used.
2. Owners invest their money to form authorized capital enterprises. In return, they are entitled to a percentage of the profits.
3. The return on equity reflects the amount of profit that the investor will receive from each ruble advanced to the company.

Return on equity formula for calculating the balance sheet

The calculation is the ratio of net profit for the year to the company's own funds for the same period. The data is taken from the Profit and Loss Statement and the Balance Sheet. If you need to find the coefficient in percent, then the result is multiplied by 100.

The formula for return on equity based on net profit:

RSK \u003d PE / SK (avg.) * 100, where

• RSK - return on equity,
• PE - net profit for the billing period,
• SC (cf.) - the average size investments for the same billing period.

Formula calculation example. Firm "A" has own funds in the amount of 100 million rubles. Net profit for the reporting year amounted to 400 million. RSK \u003d 100 million / 400 million * 100 \u003d 25%.

An investor can compare several companies in order to decide where it is more profitable to invest money.

Example. Firm "A" and "B" have the same amount of equity, 100 million rubles. The net profit of enterprise "A" is 400 million, and that of enterprise "B" is 650 million. Substitute the data into the formula. We get that the profitability ratio of the company "A" - 25%, "B" - 15%. The profitability of the first organization turned out to be higher at the expense of its own funds, and not at the expense of revenue (net profit). After all, both enterprises entered the business with the same amount of capital investment. But firm "B" worked better.

Accurate calculation of profitability

To obtain more accurate data, it makes sense to divide the analyzed period into two: calculate income at the beginning and at the end of a certain period of time.

The calculation is:

RSK \u003d PE * 365 (days in the year of interest) / ((SKng + SKkg) / 2), where

• SKng - equity at the beginning of the year;
• SKkg - the amount of own funds at the end of the reporting year.

If the indicator needs to be expressed as a percentage, then the result, respectively, is multiplied by 100.

What numbers are taken from accounting forms?

To calculate net profit (from form No. 2, “Profit and Loss Statement”; line numbers and their names are indicated):

• 2110 "Revenue";
• 2320 Interest receivable;
• 2310 "Income from participation in other organizations";
• 2340 "Other income".

To calculate the amount of equity capital (from form N1, "Balance sheet"):

• 1300 “Total for the section “Capital and reserves”” (data at the beginning of the period plus data at the end of the period);
• 1530 "Deferred income" (data at the beginning plus data at the end of the reporting period).

Calculation of the standard rate of return

How to understand that it makes sense to invest in a business? Return on equity shows the normative value. One way is to compare profitability with other options for advance money (investing in shares of other firms, buying bonds, etc.). The standard rate of return is interest on deposits in banks. This is a certain minimum, a certain boundary for determining the return of a business.

The formula for calculating the minimum profitability ratio:

RSK (n) \u003d Std * (1 - Stnp), where

• RSK (n) - the standard level of return on equity (relative value);
• Std - deposit rate (average for the reporting year);
• Stnp - income tax rate (for the reporting period).

If, as a result of calculations, the rate of return on invested own financial resources turned out to be less than RSK (n) or received a negative value, then it is unprofitable for investors to invest in this company. The final decision is made after analyzing the profitability over the past few years.

Return on equity, or ROE, is a profitability ratio that measures a firm's ability to earn a return on investment in a company. In other words, the return on equity ratio shows how much profit the company generates for every dollar of total share capital.

So the yield is 25% means that every dollar of total share capital generates 25 cents of net income. This is an important metric for investors because they want to see how well a company will use investors' funds to generate net income.

ROE is also an indicator of how effectively management is using equity capital to finance the operations and growth of the company.

Formula

The formula for return on equity is calculated by dividing net income by equity.

In most cases, ROE is calculated for common stock holders. In this case, preferred dividends are not included in the calculation, as they are not available to ordinary shareholders. Preferred dividends are then subtracted from net income to calculateROE.

The denominator is the difference between a company's assets and liabilities. Equity capital is the balance after the repayment of all liabilities of the company.In addition, the average value of share capital for Last year, therefore, the average value of the initial and final equity capital is calculated.

Analysis

Return on equity assesses how efficiently a company can use shareholders' funds to generate profits and grow the company. Unlike other ROI ratios, ROE is a rate of return from the perspective of the investor, not the company. In other words, thisROEcalculates how much a company earns based on investors' investment in the company, rather than the company's own investment in assets.

Investors want to see a high return on equity as it indicates that the company is making good use of its investors' funds. Higher odds are almost always better than lower odds, but they need to be compared to other companies in the industry. Because each industry has different levels of earnings, ROE cannot be used to effectively compare companies outside of their industries.

Many investors also prefer to calculate return on equity at the beginning of a period and at the end of a period to see the change in returns. This helps to track the progress of the company and the ability to maintain a positive profit trend.

Example 1 - Parker Hannifin

Parker Hannifin is a manufacturer of hydraulic equipment that sells tools construction companies around the world. According to the results of the reporting 2017, the company's net profit amounted to $1.287 million. The company's equity capital at the end of the reporting period amounted to$ 5 ,267 million., to the beginning$4,579. Return on equity:

ROE = $1,287 / (($4,579 + $ 5 ,267)/2) = 26,1%

The ROE of Parker Hannifin was 26.1% in 2017. This means that each dollar of a shareholder's common stock earned about $0..26 this year. In other words, shareholders saw a 26 percent return on their investment. CoefficientROE, most likely considered high for its industry. This could mean that Parker Hunnifin is a leader in his industry..

On average, statistics over the last 5-10 years of the ROE ratio will provide investors with the best picture of the growth and development of this company. However, an increase in the profitability of the company or an increase in ROE does not necessarily bring benefits to the investor. If the company maintains this profit, ordinary shareholders, the shareholders, will be able to take profits only due to the increase in the share price.

Example 2 - Goldman Sachs

Investment bank Goldman Sachs generated $8.085 million in revenue in 2017 (not including tax adjustment). At the same time, the average value of the bank's equity capital is $74.721 million.

ROE = $8,085/ $74,721 = 10.8%

This means that for every dollar invested in Goldman Sachs, the bank earns almost 11 cents. Given the bank's high financial leverage (11:1), a return on equity of 10.8% is a very low value. However, this situation is typical for the entire financial sector of the US and Europe. Before the financial crisis of 2007-2009. The ROE of US investment banks exceeded 20%.

conclusions

If you want to evaluate the return on equity in more detail and identify key catalysts, you should read the article Dupont Model (Dupont): Formulas, Examples, Application. This article will explain the three components that form ROE and go into more detail on each of them.. This will determine the source of growth or reduction of the company. For example, the DuPont model will allow you to find out whether recent improvements have beenROEcaused by 1) an increase in the level of debt or 2) an improvement in the efficiency of production

When analyzing the performance of a company, profitability indicators are often used. Usually, the following 4 main types of profitability ratios are calculated: return on sales, return on total capital, return on equity, and EBITDA return. Profitability of sales shows what share, net profit takes in total sales. Accordingly, the formula for calculating the profitability of sales is as follows:

Return on sales = net profit / sales volume (revenue)

It is clear that the higher this indicator, the better. However, there will be significant differences in its values ​​when analyzing companies. various industries. Comparison of profitability of sales should be carried out for peer companies. The reasons, for example, for an increase in this indicator, may be as follows: either the numerator of our ratio increases (ie profit), or the denominator decreases (sales volume falls), or the first and second simultaneously. Profit can change for various reasons, not necessarily due to an increase in the price of goods or services.

As for the decline in sales, it is important to understand the reasons why this happens. Webinars from the forex broker Gerchik & Co will help you with this. If sales decrease against the backdrop of an increase in price, then this development of events can be regarded as normal. If sales are falling due to a drop in interest in the company's products, then this situation should alert investors. At the same time, there may even be an increase in the profitability of sales due to a short-term increase in profits (profit is a very volatile thing and depends on many factors, such as cost reduction, a sharp decrease in depreciation and other accounting tricks). Summarizing the above, we can say that the analysis of profitability of sales is a very vague task, but with all the shortcomings of this method of analysis, it allows you to get an initial picture of the company's profitability and compare peer companies.

Return on total capital gives us an idea of ​​how effectively the company manages all its capital - equity and borrowed. The return on total capital is calculated using the formula:

Return on total capital = net profit / total capital.

The value of this indicator is strongly influenced by the amount of borrowed funds and the cost of servicing the debt. The higher the share of borrowed funds under which the company raises funds and the higher the percentage, the lower the net profit and, accordingly, the lower the return on total capital. This indicator is very important in the analysis of business performance. According to the profitability of all capital, one can compare not only companies in different industries, but also determine the most profitable industries where it is worth investing your money. Return on equity (share) capital demonstrates the company's success in increasing share capital or its inability to generate a sufficient level of profitability. The formula for return on equity is:

Return on equity = net income / equity.

In this article, we will analyze one of key indicators financial stability of the company - return on equity. Used as an appraisal financial condition 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, public funds are taken as a risk-free asset. securities which have the highest level of reliability. 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. Because this indicator is used in the evaluation of investment projects by strategic investors, then 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 return on equity ratio is the most important coefficient for assessing the financial condition of an enterprise and the level investment attractiveness and is actively used by both managers, owners and investors to diagnose financial condition.

% (percentage)

Explanation of the essence of the indicator

Return on Equity (ROE) - the indicator indicates how efficiently equity capital is used, that is, how much profit was generated for each ruble of equity capital raised. This indicator is the most important for owners (shareholders, participants), so how it allows you to determine the growth of their wealth over the analyzed period.This indicator is also used in assessing the value of the company's shares, because the return on equity allows you to understand what dividends the owners of shares can count on or how much the value of shares will increase.

It is calculated as the ratio of the company's net profit for the period and the average cost of equity for the same period.

Standard value:

Calculating the ratio for different periods helps to understand changes in returns. Clearly, higher ratios are preferable because they show a relative increase in net income generated by the same amount of capital. The trend of stable growth in the return on equity ratio means an increase in the company's ability to generate profits for owners. However, a decrease in equity (which may be caused, for example, by a share repurchase) leads to an increase in the return on equity. A high level of debt also causes an increase in the ratio, as this means that the company is using debt capital instead of its own as a source of financing.

Directions for solving the problem of finding an indicator outside the normative limits

Taking into account the calculation formula, we can state that a decrease in the amount of equity, provided that the efficiency of the company remains at the same level, will lead to an increase in the return on equity. Reducing production, marketing and other expenses will increase net profit, as will the intensification of work to increase income. Therefore, work in this direction will increase the return on equity.

Calculation formula:

Return on Equity = Net Profit (Net Loss) / Average Annual Equity * 100% (1)

Calculation example:

JSC "Web-Innovation-plus"

Unit of measurement: thousand rubles

Return on equity (2016) = 854 / (2014 /2 + 2419 /2) * 100 = 38.53%

Return on equity (2015) = 831 / (2419 /2 + 2673 /2) * 100 = 32.64%

The return on equity of the company is increasing. If in 2015 each attracted ruble of own funds allowed to receive 32.64 kopecks of net profit, then in 2016 - 38.53. If we compare this value with the yield available to owners financial instruments, then investing in JSC "Web-Innovation-plus" is more effective. The main factor in increasing profitability is the reduction in the amount of equity (shareholders withdrew part of the funds in 2014-2016). Despite this, the company's net profit continues to grow. In general, the efficiency of equity use is high.