Analysis of profit and profitability: the basic techniques and methods.

The effect of the activity of any enterprise is characterized by the profit or loss. The profit is obviously an absolute indicator, and its relative value is determined by means of profitability indicators. It is difficult to draw any conclusions only from the trivially calculated indicators, therefore it is expedient to analyze the profit and profitability of the firm.

There are many methods of analysis, but we will consider only a few. The first of these will be a horizontal analysis of profit and profitability. It consists in examining the change in these indicators within a single enterprise over time. In other words, using indicators for several periods, you can determine their absolute and relative changes, which will reveal the main trends in the dynamics of both profit and profitability. As for profits, horizontal analysis can be carried out not only on one indicator, but on the profit and loss statement as a whole. In this case, you can evaluate not only how the profit itself has changed, but also the factors that affect it.

In addition, it should be mentioned that the report mentioned above can be subjected to a vertical analysis, that is, to an analysis of the structure. With the help of it, it will be possible to trace the change in the share in revenue and profits, and the cost of production, and taxes, as well as other factors that affect the formation of profits.

Speaking of factors. The analysis of profit and profitability of the organization, called factorial, is an extremely popular technique, since it allows to identify, for example, the main problems that result in a decrease in profits. This type of profit analysis is convenient to carry out, also based on the income statement. The fact is that it reflects the process of profit formation and makes it easy to build a mathematical model that can be easily analyzed. In this case, it is necessary to study in more detail the impact on revenue of revenue, as it, in turn, also depends on two factors - the price and sales volumes. Their influence should be reflected separately.

Factor analysis with respect to profitability indicators has traditionally been associated with DuPont formulas, which, using the absolute difference method, allow to reveal the influence of factors on the return on assets (property) and equity. Before applying this technique, it is useful to slightly transform the mathematical models of these types of profitability in order to identify the factors whose impact will be evaluated. Simple transformations make it possible to conclude that the profitability of assets depends on their turnover and profitability of sales, and the effectiveness of using their own capital is also influenced by the coefficient of financial dependence.

This type of analysis can be subjected to any indicator of profit and profitability, nothing will prevent you, for example, to make the necessary calculations and implement a factor analysis of the profitability of staff. Simply in this case, you will have to transform the mathematical model yourself to take into account the factors, and also do without using predefined formulas. Of course, this type of analysis will also require information for several periods, at least two.

The described methods traditionally comprise the analysis of profit and profitability of enterprises of the real economy. However, with certain changes, you can also make an analysis of the profitability of a bank or another financial institution. In this case, the difference will not even be so much in the analysis techniques, since they are still quite general, namely in the structure of those indicators that you will analyze.