The meaning and end result of any business is to generate income. Correct analysis helps answer the question of whether the enterprise is efficient enough and meets the requirements of economic benefit.

A separate area in assessing the effectiveness of resource involvement, as well as the difference between income and expenses, is the analysis of profit indicators. In this article we will look at current profit indicators, as well as formulas for calculating them.

What is profit?

Economic science interprets that profit is those benefits that appeared as a result of the economic activity of a subject of market relations. That is, the difference between the income and expenses of the enterprise. If the result is a number greater than 0, then a profit is made, and if vice versa, then the company suffered losses.

To analyze business performance, many financial indicators are used. One of the main ones is normal and economic profit.

It is not clear to the average person why economists divide profits into different types and how they can differ. After all, if an enterprise’s accounting indicators are normal and it makes a profit, then in economic terms an open business may not be feasible. How so? Let's take a closer look next.

Types and indicators of profit

The economic concept of profit is quite broad and is assessed from different angles. But often types of profit are considered from the perspective of financial results:

• gross;
• from the sale of goods or services;
• taxable;
• clean.

Gross profit is all the profit earned by a firm from manufacturing and non-manufacturing activities that is shown and accounted for on the balance sheet.

With profit from selling goods or providing services, everything is much simpler. This is the revenue that remains after subtracting the direct costs of producing new goods from income from business activities. It is very important that this type of profit cannot take into account income and expenses from non-productive activities, as this may affect the final result.

In order to find out the taxable profit, it is necessary to subtract the debit result from the credit for the current period. It is from the result that it is necessary to calculate the amount that must be paid as tax deductions.

Net profit is the balance sheet profit after payment of all taxes, fees and other budget contributions. That is, we can say that this is the financial result that is then used to pay dividends to shareholders (if the form of ownership is a joint stock company) or remains for the purchase of new additional resources, of course, depending on one or another management policy.

We will pay special attention to the consideration of normal and economic profit.

Normal profit

Those who are just beginning to encounter economic concepts may mistakenly think that this indicator reflects the company’s revenue in some way. But this is not true at all.

This indicator is needed in order to determine what the level of profit should be to maintain the economic feasibility of using resources in the production of a particular product. If the level is insufficient, then it is worth using resources differently.

Why is normal profit calculated?

Normal profit can be considered as the level of profitability of any capital that it would be if it were invested in the form of a loan or loan. Simply put, if you take into account the implicit costs of the enterprise, then the business should generate more income than if the available funds were used in another business.

If we consider the business from the manager’s point of view, and not the efficiency of using available funds, then normal profit is the payment that is needed so that he is interested in doing this particular business.

Thus, it turns out that normal profit does not mean revenue at all, but part of economic costs. If the total income of the enterprise is equal to the above costs, then normal profit appears. The formula looks like this:

• Mon = Inya,
  Where:
  Inya - the costs are implicit.

Thus, the concept of normal profit given above can be confirmed.

Economic profit

So, let's move on to the next indicator. Economic profit is the revenue that remains after subtracting all expenses from income.

1. If you subtract economic costs from total income.
2. If you subtract implicit costs from accounting profit.

Both of these paths are the same, although visually different from each other. After all, accounting profit already takes into account explicit costs that are included in economic costs.

Some scientific publications propose to find economic profit in the following way:

• Ep = Pb - Mon,
  Where:
  Ep - economic profit;
  Pb - accounting profit;
  Mon - normal profit.

What should you remember about economic analysis?

The above indicators are used when conducting an economic analysis of the enterprise's activities. It is needed in order to understand whether it is worth pursuing an open business or whether it is better to invest your resources and time in another area.

They are used both when conducting a financial assessment and to carry out a general analysis of the state of affairs of the organization.

But it is not enough to simply calculate each of the above indicators according to the given formulas. In order to correctly assess the correctness of the policy pursued by the management of the enterprise and draw a conclusion about the profitability of the business, it is necessary to evaluate all costs, the efficiency of personnel and the return on resources involved in production.

In addition, it is necessary to conduct a horizontal and vertical analysis of the enterprise’s balance sheet, calculate the coefficients of capital productivity, profitability, solvency and some others, which help to give a correct assessment of the liquidity and financial stability of the enterprise.

Indicators for assessing the economic efficiency of investment projects. Simple methods for evaluating investment projects. Complex (discounted) methods for evaluating investment projects.

Analysis of project effectiveness is carried out on the basis of simple (static) or complex (dynamic) methods.

Simple methods.

They are based on the assumption of equal importance of project income and expenses received at different periods of time:

1. Calculation of a simple rate of return.

2. Calculation of the payback period of investments.

Simple rate of return - an indicator similar to return on capital, however, its main difference is that the simple rate of return (ROI - return on investments) is calculated as the ratio of net profit (P) for one period of time (usually a year) to the total volume capital expenditures in fixed and working capital (I):

The economic meaning of the Simple rate of return is to estimate what portion of investment costs is recovered as profit during one planning interval. By comparing the calculated Simple Rate of Return (ROI) with the minimum or average level of return, the investor can make a conclusion about the feasibility of the investment, as well as whether the analysis of the investment project should be continued. In addition, an approximate estimate of the payback period of an investment project is possible here.

In order for the Simple rate of profit to be used to evaluate the entire investment project, to determine it, it is advisable to choose the most characteristic (or normal) planning interval, since the value of the Simple rate of profit depends on which period is chosen for calculating the value of net profit . In most cases, this may be a period in which the project has already achieved the planned level of production or full development of production capacity, but the repayment of the initially taken out loans is still ongoing. If the calculation is made for a year, then take the year the enterprise reached its design capacity.

Advantages: simplicity and accessibility of calculation. However, with its help it is not always possible to accurately determine the average level of profitability over the entire billing period of the enterprise’s operation, especially for individual entrepreneurs with a long construction period and uneven receipt of profit over the years of their activity.

No one does business at a loss. Even the sale of seeds brings a certain profit to the seller. But here it’s easy to figure out what it will be and where to use it. At enterprises, profit issues are more difficult to resolve - first you need to find funds, invest them, sell goods, pay off debts, and get a net profit. How is profit margin calculated in production? Let's try to figure it all out.

Profit and costs of production

In any field of activity, and especially in production, profit and expenses are considered important concepts. These are the main economic indicators that directly form the reason and financial features of the enterprise’s activities. In order for an enterprise to ultimately form a net profit rate, it is always necessary to incur expenses. The important point is that expenses do not exceed income, otherwise the organization’s activities are meaningless. Therefore, expenses must be distributed correctly. But profit depends on how correctly employees distribute these costs and in what direction they will be directed.

Profit Rate: Definition

Having understood some concepts, it will become easier to understand the features of production economics. Thus, the rate of profit is the percentage ratio between the profit for a certain period to the capital advanced before its start. In other words, this indicator reflects the increase in capital that was invested at the beginning of the reporting period. The funds advanced, in turn, include wages to workers and production costs. The main thing in this definition is the mass of profit.

What influences profit dynamics?

The rate of profit, like any other economic indicator, depends on many factors. One of the factors influencing its dynamics is the market price and the market macroeconomic state. And, of course, the rate of net profit depends on supply and demand in the market. This indicator determines the return on investment in relation to the amount of money invested.

When there is a difference between these indicators in the direction of decreasing demand for the company's products, this indicates that the profit rate is at a low level and there is a threat of loss.

Its dynamics are influenced by changes:

• capital structure, if expenses on elements of constant capital are lower, then the rate of profit becomes higher, and vice versa;
• capital turnover rate - the higher it is, the better the effect on profit; greater income comes from short-term capital turnover, as opposed to long-term capital turnover.

Factor determining the rate of profit

The main determining factors of the rate of profit are considered to be the mass of profit, the rate of capital turnover, the cost structure of the money invested, the scale of the means of production and their savings. Each of these factors has its own impact on income and its components. But the biggest impact on profitability is the weight of the profit. This is the absolute value of the profit received. The higher this indicator, the more profitable the business. This approach helps determine the right steps in the subsequent development of the business.

How can profit be expressed?

Profit can be expressed in the profitability of the enterprise. Since this indicator is very closely intertwined with the rate of profit. What does this mean? Just like profit, the real indicator can be determined at the end of the project life cycle.

The qualitative measurement of profit is the direct rate of profit, which is calculated by the ratio of surplus value to advanced capital.

The owner can calculate the income received as a percentage of the invested funds or in monetary units common in many countries. At the moment, dollars are used when receiving and calculating profits.

How is this indicator calculated?

Profit is the final result of an enterprise’s activities, which is determined by the following formula:

P=E-W total,

where "P" is profit, "B" is revenue from sales of products, "Z total." – the total costs of creating a product and promoting it.

The calculation of the rate of return is determined by the ratio of net profit to total capital investment. Data is obtained as a percentage.

This allows you to determine the valuation of projects that directly require capital investment. And based on the data obtained, you can draw conclusions.

The higher the profit value indicator, the better for the enterprise, since profits can be invested in the further development of the organization’s project or the expansion of production. This will have a positive impact on the company’s activities and increased income in the future. Based on profit indicators, one can judge the feasibility of investing funds in the company. The value of this indicator speeds up the decision-making process.

Two ways for an enterprise to generate income

The internal rate of return is the type of return that occurs when investments and cash flows from investments are equal. In this case, the company will receive income in two ways:

• investments of capital at IRR (%) in any monetary instruments;
• investments of capital that produce cash flow, in this case all components of this flow are invested at IRR (%).

IRR in this case plays the role of a barrier. For an investor, this is a very important indicator, because after studying it, he sees whether to develop the project or reject it. If the cost of the invested funds is higher than the value of this indicator, then the project will be unprofitable and should be rejected.

IRR is the ratio of the cost of capital raised and the benefits of the project, taking into account the funds spent. The most favorable value of this indicator is achieved by reducing the time between discount rates.

How is the average rate of profit determined?

There is a natural mechanism for the formation of the average rate of profit. This value is no longer determined specifically by the market; it is formed by owners (capitalists) and investors. Here the leading role is occupied by the emergence of competition, which we will discuss below.

In general, the process of formation of the average rate of profit is that capitalists, seeing a fairly high profit received by the company, strive to earn more money in production. For this reason, more favorable sales conditions are being developed. Investors also seek to pour their capital into an industry that will generate profits. Intra-industry competition arises as more homogeneous industries appear. But inter-industry competition may also arise, which also determines the formation of the average rate of profit.

The influence of competition on this indicator

The average rate of profit is affected by two types of competition: inter-industry and intra-industry.

Intra-industry competition is rivalry in one industry where homogeneous goods are produced. Here all efforts and resources are directed to the production of this product. In this case, its cost increases. In the market, product competition is determined not by individual, but by equal social value. And its magnitude is determined by average indicators. As a result, the enterprise's profit margin may tend to decline, which has a negative impact on the overall operation. To avoid such a phenomenon, capitalists strive to introduce new technologies that facilitate a rapid production process with minimal costs and try to match market prices without losses.

Inter-industry competition is competition between the capitalists themselves from different industries, where profits and profit rates are at a higher level. Since capital is poured into various industries, they have different structures. As is known, surplus value is created only by attracting hired workers; less capital accounts for the corresponding mass of surplus value. And in enterprises with a high organic composition of capital, the surplus value will be less. The emergence of this type of competition leads to a transfer of funds from one industry to another. The movement of capital leads to a decrease in surplus value in an industry with a low structure, an increase in the production of goods, a fall in the market price, and a reduction in the industry mass. As a result of the transfusion, the average rate of profit is equalized, which is determined by the formula: P΄ cp = Ʃ m: Ʃ (C+V) × 100%,

Where Ʃm– the total surplus value that is created in different industries;

Ʃ (C+V)- the total capital advanced into various industries.

As a result, the company receives an average profit for all industries.

2 Estimated rate of return (aror)

The second accounting-based method of analyzing capital investments is the estimated rate of return (AROR), also known as return on capital (ROI). As the name suggests, this method compares the profitability of the project and the capital invested. One of the disadvantages of this method is that there are many ways to define the concept of “income” and “invested capital”. Various earnings estimates may or may not include finance charges, depreciation and amortization, and taxes. However, the most common definition of “income” when calculating AROR is “earnings before interest and taxes,” which includes depreciation and amortization.

Typically, AROR is used in two ways depending on the definition of invested capital. It may include either the initial capital invested or the average capital invested over the life of the investment. The initial capital invested consists of the cost of purchasing and installing fixed assets and increasing working capital required during the initial investment phase. However, in the final phase of the project, the capital invested is reduced to the residual value of the equipment plus the remaining working capital components.

The formula can be presented as:

(2.2),

The results obtained differ markedly from each other. However, if both the establishment of eligibility criteria and the financial analysis are carried out using the same method, the investment decisions made on their basis will not differ.

Like the payback period of investments, the AROR method has its drawbacks. It uses book earnings (rather than cash flows) as a measure of the profitability of projects. It has already been noted that there are many ways to calculate book profit, which makes it possible to manipulate the AROR indicator. Inconsistencies in earnings calculations result in widely varying AROR values, and often these inconsistencies are the result of a change in a firm's accounting policies that may be unfamiliar to the investment decision maker. In addition, book earnings suffer from “distortions” such as depreciation costs and gains or losses on the sale of fixed assets, which are not true cash flows and therefore do not impact investor wealth.

The second important disadvantage of AROR (like PP) is that it does not take into account the time aspect of the value of money. Investment returns are calculated as the average reported earnings, although returns are earned over different periods of time and may vary from year to year.

Another problem with AROR arises when the “average capital employed” case is used. Here, the initial cost and residual value of an investment are averaged to reflect the value of the assets associated over the life of the investment. The higher the residual value of an investment, the higher the denominator in the AROR formula becomes and the lower the calculated rate of return itself.

The residual value paradox is a problem in AROR investment valuation that can lead to poor decision making.

In practice, AROR is very often used to justify investment decisions. This may be because decision makers often prefer to analyze investments in terms of earnings, since the performance of managers themselves is often assessed by this criterion. There is no doubt that the use of this indicator to evaluate projects leads some organizations to making erroneous investment decisions.

Thus, one cannot help but notice that the two main “traditional” methods of analysis are not ideal. Although both are used in practice, they also have a number of serious disadvantages that lead to incorrect investment decisions. In the theoretical literature devoted to investment activity, these methods are not given much attention. They have been supplanted by “sophisticated” methods, the roots of which are in economic theory.

The economic approach to project analysis involves determining the value of the project in comparison with other projects, as well as analyzing the financial attractiveness of the project, subject to limited resources. The most well-known and often used in practice is the net present value (NPV) indicator.

Net present value allows you to obtain the most generalized characteristic of the investment result, that is, its final effect in absolute amount. Net present value is understood as the difference between the amount of cash flow reduced to the present value (by discounting) for the period of operation of the investment project and the amount of funds invested in its implementation.

(2.4),

where NPV is net present value;

DP – the amount of cash flow (in present value) for the entire period of operation of the investment project (before the start of investment in it). If the full period of operation before the start of a new investment in a given object is difficult to determine, it is taken in calculations at the rate of 5 years (this is the average depreciation period of the equipment, after which it must be replaced);

IP – the amount of investment funds (in present value) allocated for the implementation of the investment project.

If we expand the components of the previous formula, it will take the form:

NPV=

(2.5),

Where B – total benefits for year t;

C – total costs for year t;

t – corresponding year of the project (1,2,3, …n);

i – discount rate (percentage).

Describing the net present value indicator, it should be noted that it can be used not only for a comparative assessment of the effectiveness of investment projects, but also as a criterion for the feasibility of their implementation.

An investment project for which the net present value indicator is negative (see Figure 1a) or equal to zero (see Figure 1b) should be rejected, since it will not bring the investor additional income on the invested capital. Investment projects with a positive net present value (see Figure 1c) allow you to increase the investor's capital.

The net present value (NPV) indicator has obvious advantages and disadvantages.

The advantage is that this indicator is absolute and takes into account the scale of investment. This allows you to calculate the increase in the value of the company or the amount of investor capital. But these advantages also come with disadvantages.

The first is that the value of net present value is difficult, and in some cases impossible, to standardize. For example, the net present value of a certain project is 20 thousand UAH. Is it a lot or a little? It is difficult to answer this question, especially if we consider a non-alternative project. You can, of course, set a lower limit for the amount of net present value, if not reached, the project is rejected. But this is largely a voluntary measure that does not reflect the essence of the investment process.

The second drawback is related to the fact that net present income does not clearly show what investment efforts resulted in the result. Although the size of the investment is taken into account in the calculation of net present value, a relative comparison is not made.

D Another general criterion, which is much less often used in the practice of design decisions, is the benefit-cost ratio. It is defined as the sum of discounted benefits divided by the sum of discounted costs.

(2.6),

The criterion for selecting projects using the benefit-cost ratio is that if the coefficient is equal to or greater than one, the implementation of the project is considered successful. Despite the popularity of this indicator. It has flaws. This indicator is not acceptable for ranking the advantages of independent projects and is absolutely not suitable for selecting mutually exclusive projects. This indicator does not show the actual amount of net benefits from the project. For example, a small project may have a significantly higher benefit-cost ratio than a large project, and if you do not use the NPV calculation, you may make an erroneous decision on the project.

Profitability index shows the relative profitability of the project or the discounted value of cash receipts from the project per unit of investment.

The profitability index is calculated using the formula:

(2.7),

where ID is the profitability index for the investment project;

DP – the amount of cash flow in present value;

IP – the amount of investment funds allocated for the implementation of the investment project (if the investments are different in time, also reduced to the present value).

The “profitability index” indicator can also be used not only for comparative assessment, but also as a criterion when accepting an investment project for implementation.

If the value of the profitability index is less than or equal to one, then the project should be rejected due to the fact that it will not bring additional income to the investor. Consequently, investment projects can only be accepted for implementation with a profitability index value above one.

Comparing the indicators “return index” and “net present income”, let us pay attention to the fact that the results of assessing the effectiveness of investments are directly related: with an increase in the absolute value of net present income, the value of the profitability index also increases and vice versa. In addition, if the net present value is zero, the profitability index will always be equal to one. This means that only one (any) of them can be used as a criterion indicator of the feasibility of implementing an investment project. But if a comparative assessment is carried out, then in this case both indicators should be considered: net present value and profitability index, since they allow the investor to evaluate the effectiveness of investments from different sides.

Payback period– this is the period during which the amount of income received will be equal to the amount of investment made.

This indicator is calculated using the formula:

(2.8),

where PO is the payback period of the invested funds for the investment project;

IP – the amount of investment funds allocated for the implementation of the investment project (if investments are brought to the present value at different times);

- the average amount of cash flow (in present value) in the period. For short-term investments, this period is taken as one month, and for long-term investments - one year;

n – number of periods.

When characterizing the “payback period” indicator, you should pay attention to the fact that it can be used to assess not only the effectiveness of investments, but also the level of investment risks associated with liquidity (the longer the period of project implementation until its full payback, the higher the level of investment risks ). The disadvantage of this indicator is that it does not take into account those cash flows that are generated after the payback period of investments. Thus, for investment projects with a long service life, after their payback period, a much larger amount of net present value income can be obtained than for investment projects with a short service life (with a similar or even faster payback period).

Internal rate of return(IRR) is the most complex of all indicators from the perspective of the mechanism for its calculation. This indicator characterizes the level of profitability of a specific investment project, expressed by a discount rate at which the future value of cash flow from investments is reduced to the present value of the invested funds. The internal rate of return can be characterized as a discount rate at which the net present value will be reduced to zero through the discounting process.

To determine the internal rate of return, approximate calculation methods are used, one of which is the linear interpolation method. To apply this method, you must perform the following algorithm:

In this picture

is the net present value corresponding to the value of the penultimate interest rate, and

is the net present value corresponding to the value of the last interest rate.

Using the interpolation method, we find the calculated value of the internal rate of return using the formula:

(2.9)

Describing the “internal rate of return” indicator, it should be noted that it is most suitable for comparative assessment. In this case, a comparative assessment can be carried out not only within the framework of the investment projects under consideration, but also in a wider range (for example, comparison of the internal rate of return for an investment project with the level of profitability of the assets used in the current business activities of the company; with the average rate of return on investments; with the norm profitability of alternative investments - deposits, purchase of government bonds). In addition, each company, taking into account its level of investment risks, can set for itself a criterion indicator of the internal rate of return used to evaluate projects. Projects with a lower internal rate of return will be automatically rejected as not meeting the requirements for the effectiveness of real investments. In the practice of evaluating investment projects, such an indicator is called the “marginal rate of internal rate of return.”

Despite some positive properties of the IRR indicator, it has disadvantages:

There may not be a single IRR for a project. Such a variety of solutions can appear if the annual cash flows during the project implementation period change sign (from positive to negative and vice versa) several times. This happens when the income received from the project is reinvested in the project.

The use of one value of the discount rate provides that its value will be constant throughout the entire life of the project. But for projects with a long implementation period (given their high uncertainty in later periods), it is hardly possible to apply a single discount factor throughout the entire life cycle of the project.

Despite such criticism, the IRR indicator is firmly rooted in project analysis and most projects rely on it.

Modern project analysis insists on the joint use of NPV and IRR indicators. The CA criterion for evaluating a project, the internal rate of return, sets the threshold for accepting projects for implementation. Formally, IRR shows the discount rate at which the project does not increase or decrease the value of the company, therefore domestic analysts call this indicator a verified discount. It shows the cutoff value of the discount factor, which divides investments into acceptable and unacceptable.

Let's give an example of calculating efficiency indicators.

A project to develop the production of children's toys has been submitted for consideration. The planned cash flows in thousands of UAH that arise as a result of the project are distributed by year:

Let's say the project is being implemented using credit funds at a bank interest rate of 10% per year. Will your decision change if the bank increases the rate to 18%?

To solve the problem, it is necessary to determine the criteria for the net present value of the project, the benefit-cost ratio and the internal rate of return, and calculate the value of discounted cash flows at a discount rate of 10 and 18%. We summarize the calculation results in a table.

At a discount rate of 10%, the NPV of the project is UAH 144.7 thousand. . benefit ratio – costs V/C =

, which indicates the feasibility of implementing the project, because NPV>0 and V/Z>1.

At a rate of 18% NPV = -103.4, since NPV

Let's calculate the IRR value, which reflects the marginal value of the discount rate, above which the project becomes unprofitable.

IRR=10+

Let's draw a conclusion. At a discount rate of 10%, the project is profitable, but if the discount rate increases beyond 14.2%, it becomes unprofitable.

When forming an investment program, there is a need to compare projects with different durations. It is not correct to make comparisons based on NPV indicators taken from business plans. In this case, the method for calculating the NPV of the given flows is used, which is as follows:

The least common multiple (LCM) of the duration of the analyzed projects is determined Z=LCM(i, j);

Considering each of the projects as repeating a certain number of times (n) in period Z, the total NPV for each of the pairwise compared projects is determined using the formula:

NPV =NPV

…) (2.10),

Where NPV i is the net present value of the original project (taken business plan);

n – duration of the project.

i – interest rate;

Example. Select your preferred project from a set of projects A, B, C with different implementation deadlines, using the data:

The least common multiple for the duration of projects is 6. During this period, Project A can be repeated three times, and Project B twice. We analyze projects A and B in pairs. The total NPV of project A (A) in the case of three-fold repetition:

NPV(A)=3.3+

million

Total NPV(B) in case of double repetition:

NPV(B)=

million

Project B is preferable.

We carry out similar comparisons for a pairwise comparison of projects B and C, and we find that in the case of a three-fold repetition of project B, the total NPV will be:

NPV(B)=4.96+

million

In this case, Project B is preferable.

To formulate an investment program, we have a priority number of projects: B, B, A.

If dozens of projects differing in duration are analyzed, calculations take longer. In this case, they can be simplified by assuming that each of the analyzed projects is implemented an unlimited number of times. In this case, the number of terms in the formula for calculating NPV(i, n) will tend to infinity, and the value of NPV(i,+) can be found using the formula for an infinitely decreasing geometric progression:

NPV(i,+) = lim i t NPV(i n) = NPV

(2.11)

Of two pairwise compared projects, the project with a larger NPV(i,+) is preferable.

Project A: NPV(2,+)=3.3*

million

Project B: NPV(3,+)= 5.4*

million

Project B: NPV(2,+)= 4.96*

million

That. the same sequence of projects is obtained: C, B, A.

Cost-benefit analysis

In a market economy, profit is the purpose of existence of enterprises. Profitability characterizes the ability of an enterprise to produce profit, reflecting in general the efficiency of all economic activities of the enterprise.

In general, profitability as an indicator of efficiency is determined by the relationship between the economic and financial benefits received, on the one hand, and the efforts of the enterprise associated with obtaining them, on the other hand. The indicator under consideration can have different forms, depending on the gross or net profit in the numerator and the calculation base expressing effort or costs (economic asset, capital, cost of sales, cost of goods sold at sales price, etc.).

IN analysis it is necessary to present the main indicators that allow you to analyze the level of profitability.

Gross profit margin(indicator 46) characterizes the share of gross profit per leu of net sales.

Its value should remain unchanged or increase dynamically. A decrease in the level of this indicator means an increase in the cost of sales. The gross profit rate is influenced by the following factors: structure of products sold, cost of products sold, selling price. Production volume has no direct effect because, by affecting the numerator and denominator in equal proportions, the effect on the gross profit rate becomes zero. However, production volume has an indirect effect through cost, since in conditions when production volume grows, the cost per unit of production decreases due to fixed costs.

Operating profit margin(indicator 47) reflects the company’s ability to generate profit from its core activities per one lei of sales.

Net profit margin(indicator 48) characterizes the ability of the enterprise to produce net profit received on average by the enterprise per one leu of net sales.

An increase in the level of this coefficient means effective management of the production process. This coefficient depends on the income tax rate and the ability of the enterprise to take advantage of tax benefits. In conditions where the tax rate is stable, the level of net profit depends on the efficiency of using borrowed sources. The net profit rate is analyzed over time and the higher its value, the “richer” the shareholders.

Economic return (ROA)(indicator 49) characterizes the efficiency of funds used in the production process, regardless of whether they are formed from their own or borrowed sources of financing. Its value may be negative if the company incurs losses.

The amount of economic profitability can be increased either by increasing the number of asset turnovers, or by increasing the net profit margin, or both.

The analysis of economic profitability standards is carried out in dynamics and it must be higher than the inflation rate in order for the enterprise to remain in the market. In Moldova, the value is not lower than 10-15%, that is, for every leu there is at least 10-15 bans of profit. (There is an opinion of 20-25%)

The rate of economic profitability will allow the company to update and increase its assets as quickly as possible.

Return on advanced capital (indicator 50)

is a private indicator of economic profitability and reflects economic achievements in the use of production assets, regardless of the order of financing and the tax system.

Financial return (ROE) (indicator 51) measures the return on equity, and, consequently, the shareholder's financial investment in the company's shares.

Financial profitability reveals the degree of efficiency of equity capital and rewards the owners of the enterprise by paying them dividends and increasing reserves, which, in essence, represents an increase in the property of the owners. Recommended level is not less than 15%

Financial profitability depends on the level of economic profitability and the financing structure of the enterprise. It may seem strange, but an increase in financial profitability can be achieved by increasing debt. Like other indicators, return on equity is analyzed over time and in relation to other indicators. A high level of this indicator may be a consequence of insufficient capitalization (a small amount of equity capital invested in the enterprise by shareholders), and not the high efficiency of the enterprise.

Return on sales ratio (shows how much gross profit is per unit of products sold). Gross profit str130F2

Net sales str010F2

Return on investment (ROI) - shows how many monetary units the company needed to obtain one monetary unit of profit.

3 factor model of the Du Pont company.

The main apparatus is strictly determined factor models, which are quite widely used in Western accounting and analytical practice.

For example, to analyze the return on equity ratio, the following strictly determined three-factor dependence is used:

From the presented model it is clear that return on equity depends on the following three factors:

Sales profitability

resource efficiency

Structures of sources of funds advanced to a given enterprise. The significance of the identified factors from the standpoint of current management is explained by the fact that they, in a certain sense, summarize all aspects of the financial and economic activities of the enterprise, in particular, the first factor summarizes the statement of financial results, the second - the balance sheet asset, the third - the balance sheet liability.

RATE OF PROFIT. PROFITABILITY

Being an absolute value, profit is associated with the scale of production and depends on the size of the enterprise, which to a certain extent limits its analytical capabilities as a criterion for the effectiveness of its work in a market economy.

Indicators of profitability (profitability) of an enterprise allow us to assess its financial results and, ultimately, efficiency. These indicators usually include the level of profitability, or profitability ratio, which is expressed as the ratio of a particular type of profit to a certain base. Numerous profitability indicators reflect different aspects of the enterprise's activities. It is quite natural that, in general, the efficiency of an enterprise can only be determined by a system of profitability indicators.

Return on sales, which is calculated by the formula:

Rв (ROS)= (P/BP) 100%

where P is profit from sales;

Вр – sales revenue.

An increase in this indicator may reflect an increase in product prices at fixed costs or an increase in demand and, accordingly, a decrease in costs per unit of production. This indicator shows the share of profit in sales revenue, therefore, the ratio of profit to the total cost of products sold. It is with the help of this indicator that an enterprise can decide on the choice of ways to increase profits: either reduce costs or increase production volume. This indicator, calculated on the basis of net profit, is called net return on sales.

Return on assets (return on investment):

R A (ROA)= (P/A) 100%

where P is the profit of the enterprise (profit from sales, balance sheet or net profit can be used);

A is the average value of assets (property) of the enterprise for a certain period.

This indicator reflects the efficiency of use of all property of the enterprise. The dynamics of return on assets is a barometer of the state of the economy. As a factor of production, return on assets and its changes have a stimulating function in that it provides a signal to investors. In this case, the strength of the signal depends on the quantitative assessment or level of return on assets. The average return on assets in Japan is about 10.3%, and in the US -16.8%. In Japan, it is considered profitable if capital investments pay off in 7 years, and in the USA - 4.5 years.

Return on assets can be represented as the product of the following two indicators:

R A = R B * O A = (P/BP) * (BP/A) = (P/A)

where О А – asset turnover, turnover.

Thus, return on assets is primarily influenced by two groups of factors related to return on sales and asset turnover.

Typically, when analyzing return on assets, an analysis of current assets is carried out, i.e. working capital, since their influence on this indicator significantly depends on the condition and organization of working capital. The calculation is carried out using the following formula:

R O C = PE/OS

where PE is the net profit of the enterprise;

OS is the average value of the second asset section of the enterprise’s balance sheet – current assets (working capital).

An enterprise can calculate the profitability of non-current assets (fixed assets and intangible assets) in a similar way, i.e. the first asset section of the balance sheet.

Return on equity (shareholder's) capital reflects the profitability of the enterprise's own funds:

R SK (ROE)= PE/SK

where SK is the average amount of the enterprise’s equity capital for a certain period.

The peculiarity of this indicator is that, firstly, it shows the efficiency of using own funds, i.e. the net profit received per invested ruble, and, secondly, the degree of risk of the enterprise, reflecting the increase in return on equity.

In conjunction with R SC, the famous Dupont formula can be used:

R SK = (ChP/BP) * (BP/A) * (A/SK)

This formula significantly expands the analytical capabilities of the enterprise, as a result of which it is able to determine:

· dynamics of net profit in sales revenue (return on sales);

· efficiency of asset use based on sales revenue and existing trends (asset turnover);

· the capital structure of the enterprise based on the share of equity in assets;

· the influence of the above factors on return on equity.

3. Profit, rate of return

At a certain price level, a decrease in costs leads to an increase in income, i.e., the reverse side of production costs is profit. The lower the costs, the greater the profit and vice versa.

Quantitatively, profit is the difference between income from sales of products and the total costs of its production.

By economic nature, profit is a converted form of net income. The source of net income is surplus and, to a certain extent, necessary labor. Since net income is a distribution category, it can therefore be defined as the realized excess of the value of a product over production costs.

As a result of the deviation of the price of a product from its value, net income does not quantitatively coincide with the value of the surplus product. The isolation of producer costs, which take the form of cost, determines the isolation of income, which takes the form of profit.

A. Smith considered profit, on the one hand, as the result of the worker’s labor, since the value that he adds to the cost of materials is divided into two parts: payment for his labor and the profit of the entrepreneur. On the other hand, A. Smith considered profit as a result of the functioning of capital.

D. Ricardo believed that the amount of profit depends on wages: profits increase if wages decrease. One of the main factors in increasing profits is social productivity of labor, which, as it increases, leads to a decrease in the cost of labor.

According to K. Marx, profit is a transformed form of surplus value, that is, profit is a function of advanced capital. The separation of capital expenditures in the form of production costs leads to the fact that surplus value begins to represent an excess of the value (price) of a product over production costs and appears in the form of profit (p).

Many Western economists, when explaining profit, use the theory of three factors of production by J.B. Say, according to which labor, land and capital take part in the creation of value. Profit is income from the use of means of production (capital) and as payment for the work of the entrepreneur in managing and organizing production and, thus, distinguished between income on capital and entrepreneurial income.

Criticizing the theory of factors of production, K. Marx substantiated the position that new value is created by living labor. However, labor productivity depends on the technological equipment of production, fertility, location of land, etc. Consequently, capital and land contribute to the creation of greater value.

Since there were no truly market relations in the former USSR, the attitude towards profit was corresponding. It was believed that it could be established by adjusting prices and tariffs. Since the price was actually considered as an administrative standard, profit was also a product of rationing. Until the beginning of the 60s of the twentieth century. The prevailing idea was that it was enough to include profitability in the price, as the ratio of profit to cost at the level of 4-5%, and pricing was carried out in practice accordingly. In the 60s, profitability of up to 15% began to be included in the centralized price.

In a modern market economy, profit and the rate of return are the main guideline and at the same time an indicator of the state of production, a criterion of its efficiency. The rate of profit shows the efficiency of using all capital and the degree of its increase. In modern conditions, the annual profit rate of industrial corporations in the USA is 11-13%, in Western Europe - 8-10%.

Profit- this is the difference between the amount of sales (gross revenue) from the sale of products and the total cost of production.

P = C – S/S or (10.8)

р = W–K (10.9)

Enterprise profit– this is the difference between monetary proceeds (wholesale price of the enterprise) from the sale of products (works, services) (C) and their full cost (C/C).

The profit of an enterprise received from the sale of products (works, services) and adjusted depending on other income (+) and losses (-) is called balance sheet profit.

P B = C – S/S (10.10)

Since January 1, 1991, in Ukraine, not marketable products, but sold products have been used as a calculation indicator. Therefore, the mass of profit from sales is determined as the difference between the volume of products sold (without turnover tax) and the full cost of products sold (production and sales costs).

Since 1993, instead of turnover tax, the value added tax and excise taxes have been used.

The part of book profit that remains after paying taxes and other payments is called net profit.

P Ch = P B – taxes, mandatory payments (10.11)

Basic ways to increase profits enterprises:

An increase in revenue from the sale of products (works, services) based on an increase in the production of marketable products, an increase in their quality and selling price.

Reducing production costs.

The balance sheet and net profit of an enterprise in general reflect the final results of business and are the main indicators of the economic and financial activities of the enterprise.

Gross income of the enterprise– the difference between revenue from sales of products (B) and the fund for compensation of spent means of production (FV):

VD P = V – PV, or (10.12)

the amount of the wage fund and balance sheet profit of the enterprise:

VD P = FZP + P B (10.13)

The totality of the wage fund and the net profit of the enterprise forms the commercial income of the enterprise, which is at its full disposal.

From the point of view of the financial capabilities of an enterprise in expanded reproduction, it is necessary to take into account the reproductive efficiency of the enterprise. The total reproduction effect is the indicator of the enterprise's gross income (VD P), and the final reproduction effect is the indicator of the net product (P P).

Thus, gross income and net profit are the sources of formation of accumulation and consumption funds, and their size, dynamics, structure of distribution and use determine the pace and efficiency of expanded reproduction of the enterprise.

Therefore, the issue of profit margin is important for an enterprise (firm), but one should distinguish between absolute and relative profit indicators.

Absolute profit value expressed by the concept of “mass of profit”. The amount of profit in itself does not mean anything, so this value should always be compared with the annual turnover of the enterprise (company) or the amount of its capital. An indicator of the dynamics of profit, a comparison of its value in a given year with the corresponding value of previous years, is also important.

Relative profit indicator is the rate of profit (profitability), which shows the degree of return of production factors used in production.

To determine the efficiency (return on profit) of the current costs of an enterprise for the production of products (works, services), the indicator is used profit margins(PI), i.e. the ratio of book profit to the total cost of goods sold as a percentage. Its formula is as follows:

(10.14)

P B – mass of profit from sales of products (balance sheet profit),

C/C – full cost.

or

(10.15)

However, production efficiency cannot be judged only by mass and profit margin. It is necessary to take into account intensive factors influencing the movement of profits. This:

growth in labor productivity as a result of saving living and embodied labor;

cost reduction;

quality of products (work, services);

capital productivity, i.e., the efficiency of use of production assets.

Therefore, the efficiency of an enterprise is largely characterized by a general indicator - the level of profitability, which is one of the basic indicators of production efficiency at the macro and micro levels.

Profitability– this is a quantitative determination of the ratio of balance sheet profit to the average annual cost of fixed assets and standardized working capital as a percentage. In the practice of economic activity of an enterprise rate (level) of profitability determined by the formula:

(10.16)

– rate of return,

– balance sheet profit,

– average annual cost of fixed production assets,

OS N – the cost of working normalized funds.

Therefore, the rate of return shows degree of efficiency (return on profit) of the production resources used. Profitability characterizes the level of return and the degree of use of funds in the process of production and sale of products (works and services).

Basic ways to increase profitability:

cheaper elements of advanced capital;

reduction of current production costs.

Ultimately, the condition for both is the widespread use of scientific and technical progress results in production, leading to an increase in the productivity of social labor and, on this basis, a reduction in the cost of a unit of resources used in production.

In a market economy, profit is the basis for the development of an entrepreneurial company. Western economic literature proposes several theories for optimizing a company's activities, but they are not based on the principle of profit maximization. Thus, according to one theory, the goal of a company should not be to maximize profits, but to maximize sales. The company is faced with the task of achieving and maintaining a certain level of profit for as long as possible. In this case, the company will focus on the industry average rate of profit, which is the result of intra-industry competition.

No one does business at a loss. Even the sale of seeds brings a certain profit to the seller. But here it’s easy to figure out what it will be and where to use it. At enterprises, profit issues are more difficult to resolve - first you need to find funds, invest them, sell goods, pay off debts, and get a net profit. How is profit margin calculated in production? Let's try to figure it all out.

Profit and costs of production

In any field of activity, and especially in production, profit and expenses are considered important concepts. These are the main economic indicators that directly form the reason and financial features of the enterprise’s activities. In order for an enterprise to ultimately form a net profit rate, it is always necessary to incur expenses. The important point is that expenses do not exceed income, otherwise the organization’s activities are meaningless. Therefore, expenses must be distributed correctly. But profit depends on how correctly employees distribute these costs and in what direction they will be directed.

Profit Rate: Definition

Having understood some concepts, it will become easier to understand the features of production economics. Thus, the rate of profit is the percentage ratio between the profit for a certain period to the capital advanced before its start. In other words, this indicator reflects the increase in capital that was invested at the beginning of the reporting period. The funds advanced, in turn, include wages to workers and production costs. The main thing in this definition is the mass of profit.

What influences profit dynamics?

When there is a difference between these indicators in the direction of decreasing demand for the company's products, this indicates that the profit rate is at a low level and there is a threat of loss.

Its dynamics are influenced by changes:

• capital structure, if expenses on elements of constant capital are lower, then the rate of profit becomes higher, and vice versa;
• capital turnover rate - the higher it is, the better the effect on profit; greater income comes from short-term capital turnover, as opposed to long-term capital turnover.

Factor determining the rate of profit

The main determining factors of the rate of profit are considered to be the mass of profit, the rate of capital turnover, the cost structure of the money invested, the scale of the means of production and their savings. Each of these factors has its own impact on income and its components. But the biggest impact on profitability is the weight of the profit. This is the absolute value of the profit received. The higher this indicator, the more profitable the business. This approach helps determine the right steps in the subsequent development of the business.

How can profit be expressed?

Profit can be expressed in the profitability of the enterprise. Since this indicator is very closely intertwined with the rate of profit. What does this mean? Just like profit, the real indicator can be determined at the end of the project life cycle.

The qualitative measurement of profit is the direct rate of profit, which is calculated by the ratio of surplus value to advanced capital.

The owner can calculate the income received as a percentage of the invested funds or in monetary units common in many countries. At the moment, dollars are used when receiving and calculating profits.

How is this indicator calculated?

Profit is the final result of an enterprise’s activities, which is determined by the following formula:

P=E-W total,

where "P" is profit, "B" is revenue from sales of products, "Z total." - total costs of creating a product and promoting it.

The calculation of the rate of return is determined by the ratio of net profit to total capital investment. Data is obtained as a percentage.

This allows you to determine the valuation of projects that directly require capital investment. And based on the data obtained, you can draw conclusions.

The higher the profit value indicator, the better for the enterprise, since profits can be invested in the further development of the organization’s project or the expansion of production. This will have a positive impact on the company’s activities and increased income in the future. Based on profit indicators, one can judge the feasibility of investing funds in the company. The value of this indicator speeds up the decision-making process.

Two ways for an enterprise to generate income

The internal rate of return is the type of return that occurs when investments and cash flows from investments are equal. In this case, the company will receive income in two ways:

• investments of capital at IRR (%) in any monetary instruments;
• investments of capital that produce cash flow, in this case all components of this flow are invested at IRR (%).

IRR in this case plays the role of a barrier. For an investor, this is a very important indicator, because after studying it, he sees whether to develop the project or reject it. If the cost of the invested funds is higher than the value of this indicator, then the project will be unprofitable and should be rejected.

IRR is the ratio of the cost of capital raised and the benefits of the project, taking into account the funds spent. The most favorable value of this indicator is achieved by reducing the time between discount rates.

How is the average rate of profit determined?

There is a natural mechanism for the formation of the average rate of profit. This value is no longer determined specifically by the market; it is formed by owners (capitalists) and investors. Here the leading role is occupied by the emergence of competition, which we will discuss below.

In general, the process of formation of the average rate of profit is that capitalists, seeing a fairly high profit received by the company, strive to earn more money in production. For this reason, more favorable sales conditions are being developed. Investors also seek to pour their capital into an industry that will generate profits. Intra-industry competition arises as more homogeneous industries appear. But inter-industry competition may also arise, which also determines the formation of the average rate of profit.

The influence of competition on this indicator

The average rate of profit is affected by two types of competition: inter-industry and intra-industry.

Intra-industry competition is rivalry in one industry where homogeneous goods are produced. Here all efforts and resources are directed to the production of this product. In this case, its cost increases. In the market, product competition is determined not by individual, but by equal social value. And its magnitude is determined by average indicators. As a result, the enterprise's profit margin may tend to decline, which has a negative impact on the overall operation. To avoid such a phenomenon, capitalists strive to introduce new technologies that facilitate a rapid production process with minimal costs and try to match market prices without losses.

Inter-industry competition is competition between the capitalists themselves from different industries, where profits and profit rates are at a higher level. Since capital is poured into various industries, they have different structures. As is known, surplus value is created only by attracting hired workers; less capital accounts for the corresponding mass of surplus value. And in enterprises with a high organic composition of capital, the surplus value will be less. The emergence of this type of competition leads to a transfer of funds from one industry to another. The transfer of capital leads to a decrease in surplus value in an industry with a low structure, an increase in the production of goods, a fall in the market price, and a reduction in the industry mass. As a result of the transfusion, the average rate of profit is equalized, which is determined by the formula: P΄ cp =Ʃ m:Ʃ (C+V) × 100%,

Where Ʃm- the total surplus value that is created in different industries;

Ʃ (C+V)- total capital advanced into various industries.

As a result, the company receives an average profit for all industries.

Shows in detail how, over a certain unit of time, the amount of capital involved in an economic project changed. This indicator is necessary to evaluate economic activity from the standpoint of cost reduction. It represents the return over a given period divided by the average investment. It differs from the net profit rate, which is considered as the ratio of net profit to the company's revenue. One of the shortcomings of the indicator is that it ignores the difference between projects with similar average annual profits, but received over a different number of years.

Factors Affecting Estimated Rate of Return

• return on investment - increase in capital based on the results of investment activities. It can be extended over time due to the nature of the project, in which real income from capital investments appears over a long period of time. It is calculated as the ratio of profit to investments x100;
• capital structure of an enterprise - can stimulate or limit the company’s actions aimed at increasing assets. Ideally, it should correspond to the type of activity and requirements of the market player. The proportion between borrowed funds and the amount of risk capital should provide shareholders with an acceptable return on investment.
• probable savings in capacity - in simplified meanings it is meant as a distinction between the rate of profit and savings in production capacity, as well as the assets of the enterprise, which influences the rate of accumulation of funds.
• shareholder expectations require determining the lowest long-term rate of return that can bring income to shareholders, taking into account the degree of risk of the business, the possibility of increasing the cost of capital and the potential size of dividends. Most security holders are unaware of the company's true financial condition, so they have high expectations of probable earnings and influence the company accordingly.

Methods for calculating the indicator

1. Using the main formula, RNP is the ratio of average annual profit (the difference between annual income and the cost of equipment wear and tear) to the initial investment. The latter is understood as the amount of investment in fixed assets of production together with the adjustments to working capital caused by this investment.
2. Using the basic formula - the ratio of the average annual profit to the average investment (acts as the cost of capital investments required for the operation of the project in addition to the final liquidation value of the equipment, divided in half). This dependence is expressed by the formula: average investment = (starting investment + liquidation value) /2.
3. If it is necessary to use RNP to characterize projects to reduce production costs, apply the formula for the ratio of net cost savings to the initial investment. The first parameter is defined as the difference between the expected reduction in labor costs as a result of the introduction of new equipment and the total value of operating costs along with the cost of wear and tear.