How to calculate your profitability?

Where to get data for calculating profitability :

An objective assessment of profitability requires taking into account a variety of indicators, each of which is determined by a separate formula. 

For calculations, you need information about profit, revenue, capital, and assets that are used. 

All this is reflected in the financial, and tax reports of the company and the balance sheet, however, only general indicators can be calculated.

To have a deep analysis you need to have more detailed data from the area for which the calculations are carried out. 

For example, to determine the profitability ratio of a product, you will need reports on its cost and profit on sales, which can be obtained from management accounting or accounting analytics.

The formula for calculating profitability :

The profitability ratio gives an understanding of how efficiently specific resources are used in the company. 

The indicator is often expressed as a percentage, but specific units of profit can also be used.

The general formula for calculating profitability (R) looks like the ratio of profit to the desired resource, consider it :

Return on assets = net income ÷ average total assets.

This is a basic formula that can be used to calculate the profitability of any resource on which the profit of an enterprise depends.

Types of profitability indicators :

How many resources in your company affect your profit directly or indirectly, there are so many types of indicators.

Allocate profitability:

• Assets.

• Sold products.

• Commodity stock.

• Production.

• Sales.

• Fixed assets.

• Personnel.

• Investments.

• Capital.

• Project.

In some industries, there may be highly specialized types of profitability, for example, in the field of cryptocurrency, mining profitability is calculated.

In the article, we will analyze the listed types and formulas for their calculation.

Return on assets :

The assets of the company include everything that ensures the smooth operation of the enterprise and helps directly or indirectly to make a profit: money, raw materials, equipment, buildings, etc.

Assets are net, current, and non-current.

Current assets :

Current assets include assets that the company used for no more than 12 months. They are owned and borrowed. 

Examples :

• Money on hand and in bank accounts.

• Accounts receivable.

• New equipment, raw materials, stocks of finished goods or goods for resale, and work in progress.

• Bank deposits for a period not exceeding 12 months, purchased bonds, short-term bills, and savings certificates.

• Purchased for resale shares and other current assets.

Non-current assets :

The assets that are not used by the company for more than 12 months. 

It includes:

• Fixed assets: real estate, land, equipment, inventory.

• Intangible assets: patents, licenses, property rights, trademarks, reputation.

• Long-term (more than 1 year) financial investments: investments, loans, credits.

Return on non-current assets is equal to the ratio of net profit for a given period to the average value of long-term assets on the balance sheet in the same period.

Net assets :

Assets are calculated as the difference between the total value of assets, rights of the company, and its total liabilities. 

This indicator allows you to find out the amount of money that would remain on the balance sheet of the company if it had to urgently pay all debt obligations.

Profitability of sold products : 

With its help, you can get an idea of ​​the profitability of selling goods or launching new products. 

More often, the calculation is carried out at the stage of drawing up a business plan, as well as in the process of the company's work to analyze its effectiveness.

Inventory profitability :

The lion's share of capital in trading and manufacturing companies is held in the form of inventories. 

The value of profitability, in this case, makes it clear how effectively the finances invested in inventory are used, and how profitable such investments are. 

Profitability of production :

The indicator allows you to correlate the profit received from production with its costs and evaluate whether it is worth investing in the development of such products or whether it is better to abandon them.

Profitability of sales :

The calculation will help you to estimate the share of profit per one ( €, Dhs, USD) earned, and, accordingly, the current costs for the purchase of goods, their sale, logistics, etc. Based on the results of the ROS calculation, pricing is carried out.

Gross margin :

The gross margin shows the profitability of the company. 

This indicator is used to analyze the purpose and efficiency of large companies when it is impossible to assess their net profit.

Net profit :

The net profit ratio indicates the share of net profit in the overall sales structure of the company. 

Profitability of fixed assets :

The indicator reflects the effectiveness of the use of fixed assets, including equipment, which is on the company's balance sheet. 

If their value does not reach the norm, it indicates the low productivity of production assets and the need to modernize the material base.

Staff profitability :

This indicator is indirectly related to the level of income, costs, and other resources, however, its value helps to assess how effectively the company's personnel management system is implemented.

The distribution of labor resources in business plays a major role since employees are the base on which production is based, regardless of the field of activity.

ROI ( Return on investissement ) :

The indicator means the return on investment in the project during a given time. 

The coefficient is calculated before the start of investment to understand the feasibility of investments and the risks associated with their return.

Return on investment capital :

This indicator gives an understanding of the return received on capital, all or part of which was attracted from outside.

Return on marketing investment :

This is a special case that shows the return on investment in marketing, including advertising campaigns for any products (production, franchises, sales, services, etc.). 

Return on equity :

Having indicators of this coefficient can assess how efficiently the money that has been invested in the business is working. 

Depending on the need, it is possible to calculate the efficiency of using both the owner and all capital involved.

Equity :

ROE allows you to calculate the percentage return on equity of a company.

Invested capital :

It shows you the performance of all the capital invested in your business. 

This coefficient needs to be known to assess the effectiveness of the management of the capital of a joint-stock company.

Project profitability :

The profitability of the project or the accounting rate of return (ARR) shows how much you can get for each (€, USD, Dhs,...) invested in the project. 

This helps you to correctly calculate the possible profit from the implementation of short-term projects. 

An important condition is a uniform income.