Rate of return is the ratio of profit to total capital advanced or to production costs, expressed as a percentage. It characterizes the efficiency of the use of capital, the profitability of the enterprise. In financial management, the rate of return is often referred to as profitability.

Rate of return formula

Rate of Profit = Mass of Surplus Value / (Constant Capital + Variable Capital)

Net profit margin

The net profit rate characterizes the level of profitability economic activity organizations. The net profit margin is measured as a percentage and is defined as the ratio of net profit to revenue (net).

Analysis of the net profit margin is carried out in the FinEkAnalysis program in the FCD Analysis block in order to identify signs of deliberate bankruptcy.

Estimated rate of return

The estimated rate of return is the return for the period divided by the average investment made in that period.

Was the page helpful?

More found about the rate of return

1. Methodological approaches to determining the required rate of return for capital investments
   Approaches to determining the required rate of return of capital investments are considered. Their advantages and disadvantages are determined. Methods for assessing the impact of risk on
2. Methodology for analyzing the efficiency and intensity of the use of equity capital
   Shareholders require a certain rate of return from the company at the end of the financial year, therefore, first of all, a comparative analysis should be carried out on
3. Forecasting the balance sheet of a commercial organization using the percentage of sales method
   Retained earnings are projected taking into account the projected rate of return and the rate of distribution of net profit for dividends
4. Estimating the fundamental value of a business in the financial management system: methodological approaches and practical recommendations
   PJSC Tatneft is 1.41% per year, while the average rate of return is 18.76% of the amount of revenue and interest payable is -1.18% Having these indicators
5. The system of quantitative indicators of the quality of enterprise profit
   The stability of the coefficient of the gross profit of the enterprise K VPt > K VP3 > K VP2 > K VP1
6. Working capital management policy in the holding
   The second objective of the management policy working capital is to maintain working capital in volume and structure maximizing the rate of return on capital return on assets profit before taxation average value of assets At a low level
7. Discount rate
   The discount rate from an economic point of view is the rate of return that an investor receives from investments of a similar content and degree of risk. Thus, this
8. Methodology for the analysis of form No. 3 "Report on changes in equity" of accounting (financial) statements
   The recommended value of the share of reinvested profit is the same as the rate of distribution of net profit for dividends 0.4-0.6. Approximate equality of recommended
9. Financial recovery of the enterprise
   Calculation of the coefficient of the internal rate of return IRR of the discount rate at which NPV takes a zero value 8.5. Definition of discount dynamic
10. Modern trends in measuring the performance and business activity of companies
    A Smith and D Ricardo on the relationship between the rate of profit and interest D Ricardo and K Marx on the equalization of the rate of profit and its
11. Determination of the degree of return on invested capital according to the published financial statements
    Information is needed on the annual rate of return on loan capital in the country where this enterprise operates But under favorable conditions
12. Investment project
    Internal rate of return Modified internal rate of return Discounted payback period 2. Based on accounting estimates
13. Analysis of consolidated and segment reporting: methodological aspect
    The following financial ratios can be proposed as the share of current assets in property the share of cash and short-term financial investments in current assets financial independence ratio debt capital structure ratio investment ratio current liquidity ratio quick liquidity ratio absolute liquidity ratio turnover ratio of current assets asset turnover ratio profitability sales rate of return return on assets return on equity stability ratio economic growth Calculation formulas of the specified financial
14. Problems of the approach to determining the market stability of an economic entity
    Enterprises are in a state of stability when they pursue the following goals of activity maximizing the final financial result maximizing the volume of production or sales activities maximizing the rate of profit, that is, the share of profit in a unit of income minimizing costs
15. Analysis of financial statements prepared in accordance with IFRS
    Profitability of sales profit margin return on sale net profit margin 0.08 -0.02 Asset turnover ratio Asset turnover
16. Modern methodology of profit management of a joint-stock company
    JSCs following such a strategy, on the one hand, are characterized by high return on capital, the rate of return and dividends, and, on the other hand, a significant risk. At the same time, investments in inefficient
17. Classification of organizations according to the level of their financial condition
    This group of indicators includes the profitability of sales and the rate of return, which characterize, respectively, the share of profit from sales and net profit in the organization's revenue.
18. Investment attractiveness of service enterprises
    Industries such as information consulting and audit services enjoy high ROI through narrow market operations and high margins. All the benefits of being small
19. Credit policy of the enterprise: transition to system management
    The maximum amount of the discount is determined, taking into account a certain margin of safety in the form of an additional rate of return Maximum size discounts P bases - C - P bases - C Q
20. Information base for analyzing the financial results of an enterprise
    This group of indicators includes national income net income industry average profit rates average bank interest rates income tax rates inflation data refinancing rate

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

A separate direction in evaluating the effectiveness of involving resources, as well as the difference between income and expenses, is the analysis of profit indicators. In this article, we will consider current profit indicators, as well as formulas for their calculation.

What is profit?

Economic science interprets that profits are those benefits that have appeared as a result of the conduct of economic activities of a subject of market relations. That is the difference between the income and expenses of the enterprise. If the number is greater than 0, then a profit is made, and if the opposite is true, then the company has incurred losses.

Many methods are used to analyze business performance. financial indicators. One of the main ones is normal and economic profit.

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

Types and indicators of profit

The economic concept of profit is quite extensive and is evaluated from different angles. But often the types of profit are considered from the side of the financial result:

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

Gross profit is all profit received by the firm from industrial and non-productive activities, which is displayed and taken into account in the balance sheet.

With a profit from the sale of goods or the provision of services, everything is much simpler. This is the revenue that is left after subtracting the direct costs of producing new goods from the income from economic activities. It is very important that income and expenses from non-production activities cannot be taken into account in this type of profit, as this may affect the final result.

In order to find out taxable income, 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 is payable as tax deductions.

Net profit is the balance sheet total of profit after payment of all taxes, fees and other budgetary deductions. That is, we can say that this is the one financial results, which then goes to the payment of dividends to shareholders (if the form of ownership is Joint-Stock Company) or remains to buy new additional resources, of course, depending on a particular management policy.

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

Normal profit

Those who are just beginning to face economic concepts, may mistakenly think that this indicator reflects the revenue of the enterprise from any side. But that's not the case at all.

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

Why calculate normal profit?

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

If we consider the business from the side of the manager, and not the efficiency of the use of available funds, then the normal profit is the payment that is needed in order for him to be interested in doing this particular business.

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

• Mon = Inya,
  Where:
  Yin - implicit costs.

Thus, it is possible to confirm the concept normal profit above.

economic profit

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

1. If economic costs are subtracted from total income.
2. If implicit costs are subtracted from accounting profit.

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

In some scientific publications, economic profit is proposed to be found in the following way:

• Ep \u003d Pb - Mon,
  Where:
  Ep - economic profit;
  Pb - accounting profit;
  Mon - normal profit.

What you need to remember about economic analysis?

The above indicators are used when conducting economic analysis enterprise activities. It is needed in order to understand whether it is worth doing open case Or is it better to invest your resources and time in another area.

They are used as in financial evaluation, and for the implementation of a general analysis of the state of affairs of the organization.

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

In addition, it is imperative to conduct a horizontal and vertical analysis of the company's balance sheet, calculate the coefficients of return on assets, profitability, solvency and some others that help to give a correct assessment of liquidity and financial stability enterprises.

Indicators for assessing the growth of an investment project

Kirill Voronov,
Consulting group "Voronov and Maximov"

Indicators calculated without taking into account the cost of capital

Profitability of sales

Synonyms: Commercial margin. Profitability of sales.
English equivalents: commercial margin. Return on sales (ROS).

This indicator characterizes the efficiency of current operations and is calculated in the model as the ratio of net profit to sales proceeds:

,
Where CM- sales profitability indicator, expressed as a percentage, NP- net profit, SR- sales revenue (both parameters - for one planning interval).

Profitability of sales is not directly related to the evaluation of the effectiveness of investments, but is a very useful measure of the competitiveness of project products.

Simple rate of return on investment

Synonyms: Return on investment.
English equivalents: Simple rate of return. Profitability of investments.

This indicator, due to the ease of its calculation, is one of the most commonly used so-called "simple" indicators of the effectiveness of an investment project.

In general, the simple rate of return is calculated as the ratio of net income to the amount of investment and is most often given as a percentage and on an annualized basis, according to the following formula:

,
Where SSR- simple rate of return, expressed as a percentage for one planning interval, NP- net profit for one planning interval, TIC- total investment costs.

The interpretive meaning of the simple rate of return is an approximate estimate of what part invested capital is returned as profit within one planning interval. Comparing the calculated value of this indicator with the minimum or expected level of return (cost of capital), the investor may come to a preliminary conclusion on the advisability of continuing and deepening the analysis of this investment project.

Simplicity of calculation is the main advantage of a simple rate of return. Among the main shortcomings of a simple rate of return as an indicator of investment efficiency is ignoring the fact of the value of money over time and the ambiguity of choosing the initial values ​​of profit and investment costs in conditions of uneven distribution of cash flows during the project study period. Thus, the simplicity of calculation is the main and only advantage of this indicator.

Easy ROI

Synonyms: Return on investment. Payback period.
English equivalents: Pay-back period (PBP).

Payback period is one of the most commonly used measures of investment performance. Suffice it to say that this indicator, along with the internal rate of return, is chosen as the main one in the assessment methodology. investment projects participating in the competitive distribution of centralized investment resources.

The purpose of this method is to determine the duration of the period during which the project will work, as they say, "for itself". In this case, the entire amount of cash generated by the project, the main components of which are net profit and the amount of depreciation (ie net effective cash flow), is counted as a return on the initially invested capital.

In the general case, the calculation of a simple payback period is carried out by gradually, step by step, subtracting the net effective cash flow for one planning interval from the total amount of investment costs. The number of the interval in which the balance becomes negative corresponds to the desired value of the payback period of investments.

In the case of the assumption of constant amounts of cash flows (for example, in the computer model "MASTER PROJECTS: Preliminary Estimate"), the simple payback period is calculated using a simplified method, based on the following equation:

,
Where PBP- payback period, expressed in planning intervals, TIC- total investment costs of the project, NCF- net effective cash flow for one planning interval.

,
Where PBP- simple payback period, expressed in planning intervals, where NCFi- net effective cash flow in i th planning interval.

The calculation of the simple payback period, due to its specific clarity, is often used as a method for assessing the risk associated with investing. Moreover, in conditions of a shortage of investment resources (for example, at the initial stage of business development or in critical situations), this indicator may be the most significant for making a decision on investment.

A significant drawback of the indicator under consideration is that it does not in any way take into account the results of activities outside the established period of the project study and, therefore, cannot be used when comparing investment options that differ in terms of life.

Break even

Synonyms: Balance point.
English equivalents: Break-even point (BEP).

The break-even point calculation method belongs to the class of indicators that characterize the risk of an investment project. The meaning of this method, as the name implies, is to determine the minimum allowable (critical) level of production and sales, at which the project remains breakeven, that is, it does not bring any profit or loss. Accordingly, the lower this level is, the more likely it is that this project will be viable in the face of unpredictable shrinking markets. Thus, the break-even point can be used as an assessment of the marketing risk of an investment project.

The condition for calculating the break-even point can be formulated as follows: what should be the volume of production (assuming the sale of the entire volume of manufactured products), at which the resulting marginal profit (the difference between sales revenue and variable production costs) covers fixed costs project.

In computer models "MASTER PROJECTS" the break-even point is calculated as the level of sales volume:

,
Where BEP- break-even point, as a percentage of sales proceeds, FC- sum of constants production costs, MP- marginal or gross profit (all parameters - for one planning interval).

The main disadvantage of this indicator is the ignoring of tax payments. Therefore, this method is most often used when comparing projects "within" one enterprise.

Solvency point

English equivalents: Cash break-even point.

The method of calculating the solvency point is similar to the method of calculating the break-even point. The only difference is that the denominator of the calculation formula is the sum contribution margin and depreciation charges:

,
Where CBEP- solvency point, as a percentage of sales proceeds, FC- the amount of fixed production costs, MP- marginal or gross profit, DC- the amount of depreciation charges (all parameters - for one planning interval).

The meaning of the solvency point is to determine the level of production and sales at which the amount of generated cash covers the amount of current payments. The specified requirement is softer and therefore the value of the solvency point will always be less than the value of the break-even point.

Indicators calculated taking into account the cost of capital

Net present value of investment (NPV)

Synonyms: The net present value of the project. net discounted income. Integral effect of investments. The net present value of the project.
English equivalents: Net Present Value (NPV). Net Present Worth (NPW).

Net present value is one of the most commonly used measures of investment performance.

In the general case, the NPV calculation method consists in summing up the current (recalculated at the current moment) values ​​of net effective cash flows for all planning intervals throughout the study period. In this case, as a rule, liquidation or residual value project that generates additional cash flow beyond the research horizon. All of these values ​​are converted using reduction factors based on the selected comparison (discount) rate.

The classic formula for calculating NPV is as follows:

,

Where NCFi i-th planning interval, RD- discount rate (in decimal terms), life- research horizon, expressed in planning intervals.

The interpretation of the estimated net present value may vary depending on the objectives of the investment analysis and the nature of the discount rate. In the simplest case, NPV characterizes the absolute value of the total effect achieved in the implementation of the project, recalculated at the time of the decision, provided that the discount rate reflects the cost of capital. Thus, in the case of a positive NPV value, the project under consideration can be recognized as attractive from an investment point of view, a zero value corresponds to an equilibrium state, and a negative NPV value indicates that the project is unprofitable for potential investors.

Return on Investment Index (PI)

Synonyms: Return on investment index.
English equivalents: Profitability index (PI).

The indicator under consideration is closely related to the indicator of the net present value of investments, but, unlike the latter, it allows us to determine not an absolute, but a relative characteristic of the effectiveness of investments.

The Return on Investment Index (PI) is calculated using the following formula:

,
Where TIC- total investment costs of the project.

The return on investment index answers the question: what is the level of income generated by the project received per unit of capital investment.

The PI indicator is most appropriate to use to rank the available options for investing in conditions of a limited amount of investment resources.

Discounted ROI

Synonyms: Discounted return on investment.
English equivalents: Discounted pay-back period.

The method for determining the discounted payback period of investments is generally similar to the method for calculating the simple payback period, however, it is free from one of the shortcomings of the latter, namely, from ignoring the fact that cash flows arising at different points in time are not equal.

The condition for determining the discounted payback period can be formulated as finding the point in time when the present value of the income received from the project will be equal to the amount of investment costs.

In the computer model "MASTER PROJECT: Budget Approach", the simple payback period is calculated using a specially written user-defined function that solves the following equation:

,
Where DPBP- discounted payback period, NCFi- net effective cash flow i-th planning interval, RD- discount rate (in decimal terms).

The most important of options interpretation of the calculated value of the discounted payback period is its interpretation as the minimum repayment period of the investment loan, taken in the amount of the total investment costs of the project, and the interest rate of the loan is equal to the discount rate

Internal rate of return on investment (IRR)

Synonyms: Internal rate of return. Internal rate of return. Internal rate of return.
English equivalents: Internal Rate of Return (IRR). Discounted Cash Flow of Return (DCFOR).

To use the net present value method, a discount rate must be set in advance. The solution of such a problem can cause certain difficulties. Therefore, a method in which the evaluation of efficiency is based on determining the critical level of the cost of capital that can be used in a given investment project has become very widespread. This indicator is called the "internal rate of return on investment".

Calculation of the internal rate of return (IRR) is carried out by iterative selection of such value of the discount rate at which the net present value of the investment project becomes zero. This condition corresponds to the formula:

.

When calculating the IRR indicator, the full capitalization of all income received is assumed. This means that all generated funds are directed to cover current payments or reinvested with a return equal to IRR. This assumption is, by the way, one of the most significant shortcomings of this method.

The interpretative meaning of the internal rate of return is to determine the maximum cost of capital used to finance investment costs, at which the owner (holder) of the project does not incur losses.

© 1997-99 Kirill Voronov, CG "Voronov and Maksimov"

To understand the success of the enterprise, one of the main criteria is the amount of profit. IN general view Profit is the difference between in cash received from sales, and the costs of the enterprise. There is the concept of the rate of return, the calculation formula and economic essence which we will consider below.

The concept of the rate of return

In Decree of the Government of the Russian Federation of June 25, 2003 No. 367 “On Approval of the Rules for Arbitration Managers financial analysis» the definition of the net profit rate is given as the ratio of the amount of net profit to the amount of revenue, excluding value added tax and excise taxes, included in the sale price of goods or services of the enterprise.

The rate of return shows how many kopecks of profit fall on each ruble of revenue. This indicator allows you to evaluate how effective the ratio of the company's costs and funds received from sales.

The formula for calculating the rate of return

Rate of return = Net profit / Revenue

The numerator is the indicator of net profit, which is the final indicator of the profitability of the enterprise, cleared of all possible expenses.

For the lines of Form 2 "Profit and Loss Statement", the formula is calculated as:

Net income = Profit (loss) before tax - Current income tax - Change in deferred tax liabilities - Change in deferred tax assets - Other

The denominator is the revenue indicator, which reflects the amount of revenue received by the enterprise from the sale of goods and services in this reporting period, net of value added tax and excises. In Form 2 "Profit and Loss Statement" this indicator is reflected in line 2110 "Revenue".

Application of the rate of return

The rate of return is applied by the management of the company to:

• tracking the dynamics of business profitability when the indicator is compared with previous periods;
• comparing the performance of branches, divisions or subsidiaries dependent companies companies for the purpose of analyzing the effectiveness of an asset and the subsequent decision to transform the structure of the asset portfolio;
• benchmark with other companies in the industry, if the average rate of return for similar companies is known, which allows you to maintain or achieve competitive advantages at a price at low cost;
• the expected rate of return is used to decide whether to launch or abandon an investment project, or when choosing from among several investment projects, when the investment with the highest rate of return is preferred.

Factors affecting the rate of return

The rate of return is formed by the ratio of two indicators of profitability, respectively, the factors affecting the numerator and denominator also affect the final value.

The numerator, revenue, depends on the volume of sales in natural units of measurement and on the selling price of the company's goods or services. In the same time price policy companies that have set rules for payments - with deferrals, advance payments, and so on - also affect sales.

Net profit depends both on the price and volume of sales, and on all costs incurred by the enterprise in the course of economic activity, both production and related to other supporting processes in the company.

So, a company can sell large volumes of products at affordable prices, but if the cost is very high and other costs are also higher than their acceptable level, then the entire effect of large sales will be offset by inefficient production and management processes.

Shows in detail how for a certain unit of time there was a change in the amount of capital involved in economic project. This indicator is necessary to assess economic activity from the standpoint of cost reduction. It represents the income for a certain period, divided by the average size of the investment. It differs from the net profit margin, which is considered as the ratio of net profit to the company's revenue. One of the disadvantages of the indicator is that it ignores the difference between projects with a similar average annual profit, but received for a different number of years.

Factors Affecting Estimated Rate of Return

• return on investment - increase in capital based on results investment activity. It can be extended in time due to the nature of the project, in which the real income from capital investments appears after a long time. It is calculated as the ratio of profit to invested investments x100;
• capital structure of the enterprise - can stimulate or limit the company's actions aimed at increasing assets. Ideally, it should correspond to the type of activity and the 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 capacity savings - in simplified terms, it is understood as a distinction between the rate of return and savings production capacity, as well as the assets of the enterprise, which affects the degree of accumulation of funds.
• shareholder expectations - require the determination of the lowest long-term rate of return that can bring returns 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 holders valuable papers don't know about the real financial condition company, so they have inflated expectations about likely returns and influence the company accordingly.

Methods for calculating the indicator

1. Using the main RNP formula - the ratio of the average annual profit (the difference between annual income and the cost of depreciation of equipment) to the initial investment. The latter is understood as the amount of investment in the main means 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 value of the investment (acts as the cost of capital investments required to operate 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 initial investment. The first parameter is defined as the difference between the expected reduction in maintenance costs work force as a result of the introduction of new equipment and the total value of operating costs together with the cost of depreciation.