Coefficient of return on equity, other indicators of profitability and their analysis

The goal of creating any company is to make a profit, this is unquestionable. But profit is an indicator not only largely conditional, but absolute. In other words, based only on the amount of profits received, it is impossible to compare different enterprises among themselves. It is more correct to make comparisons in terms of relative indicators. In the field of studying profit and profitability, the most popular relative indicators belong to the class of profitability indicators. They are represented by a very wide range of values, but we will dwell on how to determine the return on equity, as well as assets and core business.

In order to produce products or services, the company carries out costs, thus forming a cost price. By the relation of the received profit to the given size of the cost price we will define profitability of primary activity. This ratio shows how much each ruble invested in the costs allows you to make a profit.

An indispensable condition for the existence of a firm is the presence of the owner, so it is expedient to calculate the efficiency of the enterprise from its point of view. Usually for this purpose the coefficient of return on equity is calculated . Its calculation is extremely clear and consists in dividing the net profit by the amount of equity, which can easily be found in the passive balance of the firm. With the help of this indicator, one can judge the amount of profit attributable to each unit of the owner's capital. Very often the coefficient of return on equity is subjected to a separate analysis, which we will discuss below.

Any labor process is characterized by the presence of objects and means of labor. They are assets that form the asset of the balance of the enterprise. In this regard, it makes sense to calculate the return on assets. Obviously, for this it is enough to divide the profit into the balance total. Most often, the calculation is based on net profit, but sometimes profits are also used, which is not yet cleared of taxes.

When studying this group of indicators often conduct a special analysis of the return on equity, as well as assets, which is called factorial. Return on assets in the most direct way depends on their turnover and profitability of sales, the quality of use of equity is also dependent on the coefficient of financial dependence. You may be interested, why exactly these factors? In fact, everything is extremely simple. Consider the profitability of assets, presented as a ratio of net profit and the amount of assets. Multiplying the numerator of the fraction and its denominator by the company's revenue, and then making small changes, we get the product turnover indicators for the profitability of sales. The coefficient of profitability of equity should be multiplied by assets and divided into them.

After determining the factors, you need to calculate their values over a number of years, and then determine how each of them changed in absolute value from period to period. At the last stage, using the method of absolute differences , the isolated influence of each factor is determined, and upon their addition, we obtain a change in the resulting indicator over the entire period.

It is worthwhile to study all the indicators of profitability not only from the position of revealing the influence of factors on them, but also from the point of view of their change in dynamics. Obviously, the presence of positive dynamics is a positive development. However, even the presence of positive dynamics does not always unambiguously characterize the enterprise. The fact is that other similar enterprises can be much more efficient, so it is also necessary to compare the profitability of the firm with the average industry values.