We estimate the efficiency of the firm through the profitability of current assets and other indicators

Perhaps, if you ask any person what index he could name as the main indicator of the effectiveness of a particular firm, this indicator would be profit. This is understandable, because profitability largely determines whether the enterprise will exist in the future. However, different organizations may be differently profitable, but they still need to be compared in some way. For this purpose, the profitability indicators are calculated. In other words, profitability is a certain level of profitability.

The methodology for calculating profitability levels is extremely simple, therefore, remembering one ratio, you can calculate any indicator. The essence of the calculation is the ratio of the profit received to the amount of profitability of what you want to establish. So, for example, it is quite obvious how to calculate the profitability of assets: it is enough to divide the net profit or profit before taxation into a balance total. Usually profitability is expressed as a percentage. In this case, it allows you to judge the effectiveness of the use of property that is owned by the organization. As you can see, the numerator can have different profits, which is a feature of this group of indicators. Depending on your choice of indicators may vary, which allows them to be regarded as sufficiently subjective.

In addition to the profitability of all property, it is possible to determine the profitability of current assets and non-current assets. Obviously, for this it is necessary to divide the profit by the total of the corresponding section of the balance, and then express it in percent. The profitability of current assets shows their ability to make a profit, as well as the effectiveness of their use. The sense of profitability of non-current assets is similar.

You can compare profits not only with assets, but also with liabilities. The greatest interest is represented by the profitability of the organization's own capital , that is, the amount of profit attributable to the owner's unit of capital. With the help of this criterion, it is possible to compare different enterprises from the point of view of the owner, for example, in order to choose the most attractive object of investment.

When we calculate the profitability of current assets, the denominator is the sum of these assets. One of their components is finished products, that is, its cost. Calculating the profitability of products can also be very useful. This indicator will characterize how much profit is brought by the money that generated the costs. For its calculation, the sales profit indicator is traditionally used.

Profit from sales is also used in determining the profitability of sales, which is logical. The sense of this profitability is concluded in what proportion of the company's revenue is profit.

The definition of all the indicators described above in one period may not be sufficient. The fact is that they do not have normative values, so they can only be compared with each other. For this comparison, you can use either industry-average indicators or the performance of analogical enterprises. Much more practical interest is a comparison in dynamics, that is, a comparison with the levels of previous periods and the subsequent determination of certain trends. Obviously, the decline in profitability requires identifying the causes of deterioration, and its growth - identifying factors that can be used in the future.

Of considerable interest is factor analysis, which allows us to assess the isolated and cumulative effect of these or other factors on each of the profitability indicators. For example, the profitability of current assets depends on the profitability of sales and on the turnover of this part of assets. Using the methods of chain substitutions or absolute differences without much difficulty, it is possible to identify the factors whose influence is most severe, and then use the results obtained in order to make the most effective and justified management decisions.