Profitability (explained in simple words): sales by net profit, equity, products, production, costs

Profitability is a calculated value that shows how efficiently an enterprise operates. This is a digital value that is used by founders, directors, investors.

It is gross profitability that allows you to evaluate the effectiveness of investments, resources used, and even the quality of staff work. In practice, the calculation formula can be applied to almost any business environment.

This could be the enterprise as a whole, its remote branch, or a newly created division. You can calculate profitability using ready-made formulas in Excel or transfer it to qualified assistants for execution. In the second case, the obtained values ​​can be used for profit forecasts.

What is profitability

In practice, specialists use a large number of calculation algorithms. For a better understanding, I suggest turning to a simple example. Consider the business of running a gas station:

• Investments – 10 million rubles;
• Revenue per month – 0.6 million rubles;
• Staff salaries, payments to suppliers, taxes and other expenses – 0.4 million rubles.

Using simple calculations, you can calculate the profitability per month of 0.2 million rubles, and per year it will be 2.4 million rubles. Dividing the amount of initial investment by the financial result, we obtain a return on investment horizon of 4.16.

This will be the number of years after which the entrepreneur will begin to receive income from the investment. In practice, this formula can be complicated or detailed. For example, if the investment is not your own funds, but a loan from a bank. In this case, the flow of expenses will increase by the amount of debt repayment.

If you take out a bank loan of 10 million rubles for 10 years, then on average you will have to repay 100,000 rubles per month.

Based on the fact that the profit per month will already be 0.1 million rubles, the payback period will be 8.33. Based on the obtained value, the entrepreneur will need to revise his business plan, reducing costs by optimizing staff, changing the tax regime, or increasing the client flow. Everything is simple here.

What is it measured in?

In most cases, the calculated value is measured as a percentage. In practice, you can use ready-made industry indicators or get the value using a specific example. It should be understood that application to a specific business model will require a systematic revision of the values.

In simple terms, the gross profit margin of a business may look like this: for a shoe company, 0.3 or 30 percent. Returning to industry values, you can use the latter as a guide, for example, in your region.

If in the Vologda region the profitability of shoe production is 0.45, and yours is 0.35, you should seriously reconsider the efficiency of the enterprise. Typically, negative factors include inflated prices for raw materials, lack of tax optimization, or lack of control over employee work.

Profitability is almost always measured in numbers. In this case, the numerical expression will depend on the purpose of the calculations. In the gas station example, this is the payback period. In the case of footwear manufacturing, it is a benchmark for the ongoing performance of the business.

In any case, both meanings should be used by the entrepreneur as a call to action - to review the development strategy.

An example of a profitable and unprofitable business

The faster investments in a business pay off, the higher the company’s profit for the reporting period, the greater the operating efficiency of the enterprise itself. In practice, there are low- and high-profit companies. Industries in which there is an active return on investment are considered the most developed, and the niches are occupied.

An unprofitable or low-profit business always has a right to exist. In this case, the entrepreneur can count on the weak influence of the competitive environment. At the same time, it is gross profitability that will have a direct impact on the choice of development strategy. Every detail will need to be taken into account.

Profitable types of business, as a rule, are characterized by a clear advantage. Typically these are small industries operating at a factor of ½. What it is?

This is when the cost of shipped products is calculated as double the cost of purchasing inventory. In this case, it is easier for an entrepreneur to navigate the market.

Examples of profitable businesses:

• Printing production. Industry profitability from 100%;
• Franchise work - catering establishments, sale of smartphones, travel services. In this case, a businessman buys an enterprise with well-functioning management systems, logistics, and a confirmed level of profitability in the regions of presence in the range from 80 to 130%;
• Car service, car wash. A car today is not a luxury, but a means of transportation. For this reason, repair and maintenance services remain in high demand. Investments at the initial stage will require attracting rented space, purchasing tools, and paying for training courses. The gross profitability of a small business will be from 130%.

Examples of enterprises that do not allow you to quickly “recoup” investments include the following:

• Private kindergarten. Increased maintenance requirements, high rent, staff. The profitability of such a business continues to remain at 40%;
• Furniture restoration. Characterized by unstable market demand. Economic profitability at 30-60%;
• Renting out real estate. Characterized by a high load on utilities. During a crisis, demand drops sharply, causing losses for the businessman, and the profitability horizon is negative.

Why count it?

Obtaining specific levels of profitability is used at any stage of business development:

• When drawing up a business plan. Reporting data is used by the business organizer, evaluated by investors, banks, and, in general, future creditors;
• When working with pricing for the company's main product. based on profitability, the acceptable cost range is calculated;
• When making a profit or loss forecast;
• During the period of analysis of the enterprise management system. Areas in which surgical intervention is needed in order to correct existing processes are studied and identified;
• When calculating the value of a business, for example, when selling a company. The higher the profitability, the more expensive the enterprise can be sold.

Accounts payable turnover

Accounts payable turnover is an indicator of how quickly an organization repays its debts to suppliers and contractors.

This ratio shows how many times (usually per year) the company has repaid the average amount of its accounts payable.

Accounts payable turnover is calculated as the ratio of the cost of acquired resources to the average amount of accounts payable for the period.

Accounts payable turnover ratio formula:

Accounts Payable Turnover = Purchases / Average Accounts Payable

Since the purchase indicator is not contained in the financial statements, a simplified calculation option is used:

Purchases = Cost of Sales + (Ending Inventory – Beginning Inventory)

In practice, a more conventional calculation option is often used, when instead of purchases they take revenue for the period:

Accounts payable turnover = Revenue/Average accounts payable

Accounts payable turnover ratio = line 2110/(line 1520 at the beginning of the year + line 1520 at the end of the year)*0.5

Where:

Page 2110 — revenue from form No. 2;

Page 1520 - accounts payable from form No. 1.

The coefficient does not have a specific standard value.

The higher the value of this coefficient, the higher the speed of payment of debts to creditors by the enterprise.

For creditors, a higher turnover ratio is preferable, while the organization itself is more profitable with a low ratio, which allows it to have the balance of unpaid accounts payable as a free source of financing for its current activities.

Types of profitability

Performance indicators can be calculated at all levels of business development. The settlement environment can be either an individual asset or resource, or an entire sector of the economy. In practice, the calculation of the level of profitability as part of management reporting is calculated for the following categories:

• Enterprises;
• Sales or ROS;
• Assets – current and non-current (attracted) or ROA;
• Fixed assets, inventories or ROFA;
• Personnel;
• Goods or manufactured products;
• Production;
• Investment or ROI;
• Equity or ROE.

Enterprises

The simplest calculation of profitability. The enterprise formula is as follows:

R = Profit / Investment size * 100%

The resulting value will depend on the source data. If the profit is taken for a month, then the economic profitability will show the efficiency of the enterprise for the reporting 30 days.

Products and services

Another indicator showing the profitability of the organization per each invested ruble. The product formula looks like this:

Rpr. = Profit/Product Cost*100%

In practice, indicators are used variably:

• Based on net profit or sales only;
• At the cost of production or recalculated for the entire enterprise as a whole (personnel costs, taxes).

Assets

In order to calculate the efficiency of using the resources involved - buildings, machines, raw materials and other company capacities, the ROA methodology is used.

If return on assets is zero or negative, this raises serious questions for business owners or management who continue to use unprofitable instruments.

Gross profitability formula (ROA) = profit for the period under study / value of assets on the balance sheet.

Basic earnings per share

The main indicator taken into account when analyzing a company's market ratios is basic earnings per share.

Basic earnings per share shows how much profit the company earned per share during the period.

If basic earnings per share are rising, it means that investments are being used effectively and the company's profits are growing.

Basic earnings per share are calculated for holders of a company's common stock and are calculated by dividing profit or loss attributable to that class of shareholders by the weighted average number of common shares outstanding for the period.

Profitability indicators

The ratios obtained during the calculations form the basis of management reporting. Enterprise profitability indicators allow you to assess how efficiently a company or its individual unit operates.

In most cases, when calculating, they are guided by the value of net profit to one of the values: ROA, ROS, ROFA, ROI or ROE.

Based on the obtained values, tables can be compiled to monitor production indicators. Enterprise management is structured according to profitability thresholds (benchmarks) or updating standards in connection with changes in external economic factors.

Such criteria include inflation, growth in wages for specialists, and dynamics of regional taxation.

How to calculate profitability (formulas)

In most cases, a simple algorithm is used to calculate indicators. The benchmark is the profit received or the financial result. The ratio involves the factor under study - the cost of machinery, equipment, the purchase of raw materials or the payment of personnel.

The initial data for analysis is taken from the financial statements (balance sheet).

The profitability ratio looks like this: R = PE/A, where A is the type of enterprise asset to be assessed. The main issue to be resolved is to find the necessary information to calculate efficiency. In accounting practice, profitability calculations can be calculated automatically.

For example, this can be done by automated AIS (1C) complexes.

Formulas for determining profitability by type of resources involved:

Assets

The resources of an enterprise or, in fact, everything that is used to obtain a financial result - profit. The mix of assets is different for different types of businesses. In pure sales, this is the management department, office equipment, communications equipment, and rented premises.

For production, these are machines and equipment, logistics, workers and operators, sales department, and administrative resources.

Assets can also be funds involved in the company’s turnover. For example, to start production, raw material costs are required. For managers, these are so-called long-term investments, which are recouped in the production flow and delivered to the buyer.

The return of part of the value of the assets occurs in the form of proceeds to the current account upon completion of the terms of the contract.

Return on current assets RCA

When calculating the efficiency of the resources involved, indicators by type of property are of particular importance. Current assets include the following:

• Cash in accounts, in the cash register, issued for reporting;
• Semi-finished products, finished products in warehouse, materials and production equipment;
• Accounts receivable – money that should go to the company’s current account in the near future;
• Financial investments.

As a general rule, the useful life of such resources should be less than a year.

The calculation formula is as follows: R = PE/OA, where PE is net profit, OA is current assets on the balance sheet.

Return on non-current assets ROA

This type of capacity involved in the production of the main product, sales, and provision of services refers to resources that fall outside the main operating cycle. Non-current assets include:

• Fixed assets. Machinery and equipment, buildings and structures, land plots;
• Financial investments with a return period of more than one year. These are loans and credits, authorized capital, investments in third-party projects;
• Intangible assets. This includes branding, patents, and business reputation index.

The profitability ratio is calculated as the type of power being studied to the quantitative indicator. The most commonly used method is cost calculation.

Profitability of products sold ROM

The calculation of the indicator is based on data obtained by the financial analytics department. The profitability of products, goods or ROM is calculated as the ratio of net profit from sales (revenue minus sales costs) and cost.

The last indicator refers to the total cost of obtaining a production result. If in the reporting month 4,000 units of products were sold (not shipped), then the cost should be calculated based on the same quantity, and not the cost of materials for 30 days.

Overestimation of the initial data should be avoided, if only because the costs will include material reserves stored in the warehouse.

The formula is as follows: ROM = PE/SS*100%, where PE is net profit, SS is production cost.

Return on Sales ROS

Determining the rate of revenue growth, cost reduction, and the impact of changes in the assortment. To calculate the ROS sales profitability ratio at an enterprise, an assessment of the following parameters is used:

• Efficiency of sales of basic products;
• Factors influencing pricing;
• The degree of influence of changes in production technology.

Return on sales in practice is defined as the ratio of net profit to revenue: ROS = PE/B*100%, where PE is net profit, B is revenue.

Return on fixed assets ROFA

The efficiency of use of production assets involved in the production of the main product shows how profitable equipment, machines and other resources are. When calculating ROFA, both general analytics and detail for each fixed asset can be used.

Profitability of OS = PE/Cos*100%, where PE is net profit, Sos is the cost of funds on the date of calculation.

ROL personnel profitability

No less often, enterprises make miscalculations in the efficiency of the employees involved. The need to optimize or expand staff, increase the number of qualified workers, including in individual departments, is calculated using the ROL formula:

Profitability of the main activities of personnel = PE/costs of Phos * 100%, where Phos is the wage fund for the period in which the net profit was received.

Return on Investment ROI

This indicator is often calculated during the planning period for opening a business. The cost formula is suitable for evaluating any type of investment.

The formula is as follows: ROI = PE/Zi*100%, where PE is net profit, Zi is the investor’s costs.

Return on Investment ROIC

The detailing of the previous indicator is used by the founders and partners of companies. The difference in the calculation method is to take into account the dynamics of profit generation, including additional income. More often, average values ​​are used, for example, over a year or several years.

Example: an investor purchased equipment for an enterprise for 3 million rubles. The net profit from investments amounted to 340,000 rubles in the first year, 450,000 rubles in the second year, and 290,000 rubles in the third. Accordingly, to obtain ROIC it will be necessary to obtain intermediate values:

1. 340000/3000000*100% = 11,33%.
2. 450000/3000000*100% = 15%.
3. 290000/3000000*100% = 9.66%.

ROIC for three years is calculated as follows: 3* √11.33*15*9.66*100% = 11.79%

The general formula will look like this: R for the period: T* √D1*D2*…Dn*100%, where N is the number of years, D1, D2 and Dn are the returns by period.

Return on Equity ROE

Calculating this indicator allows you to determine the return on investment in the company. In many ways, ROE is similar to ROI, but has some differences since the founder's share is taken into account. Based on profitability, we can conclude whether it is profitable to invest in an enterprise at a given stage of development.

Equity formula ROE = PE/K + P*100%, where PE is net profit, K is the amount of attracted capital, P is the employed reserves of the enterprise.

BEP Profitability Threshold

The critical point or profitability ratio at which the company does not go to a loss. The BEP formula remains relevant during periods of crisis, high staff turnover or loss of strategic partners. When calculating, a more complex formula is used, which takes into account the total costs of the enterprise.

Profitability threshold depending on fixed and variable costs:

BEP = Bp*Opost.i/V-Operem.i, where Vp is sales revenue, Opost.i is the volume of fixed costs and Operem.i is the volume of variable costs.

The profitability threshold is associated with the margin of financial strength of the enterprise. When working in this direction, managers often focus on the price of the product.

BEP in this case will be expressed as follows = SPZ/Product-Product, where SPZ is the total fixed costs, Product is the price and Product is the cost per unit or volume of production.

Return on Cost ROCS

A clearer picture of the company’s financial stability can be shown by efficiency calculated based on the full cost of production. In addition to raw material costs and equipment maintenance, personnel costs, utilities, and taxes are taken into account.

The end result of determining return on costs or ROCS shows how much income each ruble invested in the enterprise shows.

ROCS = VP/NR(SP), where VP is gross profit, NR is non-capitalized expenses or cost of sales.

In practice, the formula can be detailed to the required level. It is ROCS that is used for comparison with official statistics. For certain industries, regulatory limited values ​​are established:

• Production of bakery products, milk – not higher than 15%;
• Light industry enterprises – no more than 35%;
• Pharmaceuticals – no higher than 25%.

Return on total assets (ROTA)

Unlike ROA, this indicator takes into account not the net, but the operating profit of the organization. A decrease in value indicates the prevalence of borrowed resources in the capital structure, as well as the use of non-productive assets.

Formula ROTA = OP/A, where OP is operating profit or EBIT (excluding taxes and interest), A is the valuation of assets.

Project profitability

One of the forecast indicators, which is derived for the purpose of assessing the future of the enterprise. It is used by those who start their own business or investors. Both are trying to understand whether it is worth investing in an enterprise that has not yet been launched (underdeveloped).

The initial data for the calculation are the total and target volume of investments, the first net profit and accrued depreciation.

The first formula for calculating the project profitability ratio = SSbusiness/Private investments, where SS is the total cost and O is the volume.

The second formula for project evaluation = (net profit + depreciation) / costs.

From the first formula, an investor can assess the degree of effectiveness of his investments by share of participation. The higher the coefficient, the more profit the capitalist will receive from the enterprise.

In the second case, operational information is used, according to which it is possible to determine the payback period of investments and assess the prospects for achieving the first profit without additional investments.

How do companies use ROA and ROE?

Most companies look at ROA and ROE in conjunction with various other profitability measures such as gross profit or net profit. Together, these numbers give you an overall idea of ​​the company's health, especially compared to its competitors.

The numbers themselves aren't that useful, but you can compare them to other industry results or to your own results over time. This trend analysis will tell you which direction your company's financial health is heading.

Often investors care about these ratios more than managers within companies. They look at them to determine whether they should invest in the company.

This is a good indicator of whether the company can generate profits that are worth investing in. Likewise, banks will look at these figures to decide whether to lend to the business.

Managers in some industries find ROA more useful in decision making. Since this indicator reflects the profit generated from the main activity, it can be used by industrial or manufacturing companies to measure efficiency.

For example, a construction company might compare its ROA to its competitors and see that its rival has a better ROA, even though its profits are high. This is often the decisive push for these companies.

Once you have figured out how to make more profit, you figure out how to do it with fewer assets.

ROE, on the other hand, is more relevant to the board of directors than to the manager, which has little influence on how much stock and debt the company has.

Profitability of an enterprise, production, project

General performance indicators of an operating company or an event planned for launch allow for a timely assessment of the situation. Based on the obtained values, one can judge the level of return on invested funds, the profitability of the organization, and the quality of planning.

Comparing the profitability of the main activity of an enterprise, production, we can say about the level of detail of the calculations carried out. In the case of an entire company, the numbers will be more aggregated.

The production or project formula will allow you to identify deviations from a successful business, make timely adjustments to existing processes, debug them or leave the market.

Influence of profitability factors

Once the calculated values ​​are obtained, business managers receive clear guidance for action. If at the level of middle management this is a call to increase revenue (profit), then for senior management this is a reason to conduct a serious analysis.

Factors influencing the level of profitability can be divided into external and internal.

External influence often does not depend on the entrepreneur himself or his business. This is an external influence that is a consequence of being in a certain environment where there is competition and a consumer with frequently changing behavior.

External factors:

• Level of demand;
• Competition;
• Geography of production;
• Impact of sanctions;
• Dynamics of the legislative framework;
• Introduction of new technologies;
• Inflation and other macroeconomic phenomena.

Each of these factors, to one degree or another, affects the profitability of core activities, often for the worse. The calculation of the value will be purely conditional. Speaking about the enterprise, most likely there will be some kind of correction factor.

Internal factors are more amenable to analysis, assessment and adjustment:

• The quality of the product range, its volume and structure;
• Level of business reputation;
• Pricing;
• Working conditions;
• Financial policy of the company;
• Marketing strategy (its availability);
• Logistics quality;
• Systematic approach to equipment modernization.

Example: as a result of the influence of an external factor - changes in product quality requirements, the company had to re-equip its facilities.
This reduced profitability by 8%. One of the decisions made at the meeting was the introduction of a new development strategy in the form of advertising campaigns and marketing campaigns, which made it possible to increase revenue. Profitability increased by 9%.

Index method of factor analysis

Profitability or its level directly shows how productive an organization is. With data obtained from the income statement in a professional setting, factor analysis of performance can be performed.

For example, return on sales will be calculated using the formula:

R = (Revenue-Cost of sales-commercial expenses-administrative expenses)/revenue

Factor analysis allows not only to determine the level of profitability, but also the degree of influence of factors (hence the name of the method). For this purpose, the calculation formula is expanded by using data from two periods, for example, at the beginning and end of the month:

ΔR = ((Revenue1 – Cost – selling expenses – management costs)/Revenue1 – (Revenue2 – Cost – selling costs – management costs)/Revenue2)*100%

The resulting value will allow you to accurately determine how much impact revenue has on profitability. Similarly, by changing the initial values ​​of commercial and administrative expenses, as well as cost, in the formula, you can determine the degree of influence on the profitability of each factor.

Real enterprise value

Potential investors are usually very interested in the enterprise's real value ratio.

It is calculated as the ratio of the market value of the enterprise to the book value of the enterprise.

The market value of an enterprise (business) is the most likely price at which it can be sold on the day of valuation under the following conditions: the alienation takes place on an open market with existing competition, the participants in the transaction act reasonably and have complete information about the subject of sale, and its cost is not affected by any force majeure circumstances.

If the value of the enterprise real value ratio is greater than or equal to 1, then the company is attractive to investors.

In conclusion, we provide the necessary information on the main financial ratios for each group of company performance indicators in tabular form:

Ways to increase profitability

In the absence of professional analysis, business leaders often take drastic measures. This is a strong reduction in cost or staff reduction. In the first case, the consumer receives a strong reduction in quality, which invariably reduces the company's market share.

In the second case, the enterprise is left without qualified personnel, which clearly affects the efficiency of the enterprise as a whole, revenue, and a decrease in capital turnover.

After receiving the results of calculations by type of profitability, the management of the enterprise receives real directions for work:

• Reduced production costs. Can be achieved through new communications, restructuring of the supplier portfolio, modernization of machinery and equipment;
• Increase in revenue. Introduction of progressive sales methods, new production technologies, revision of sales policy;
• Conducting marketing research.

Answers to frequently asked questions

For a small enterprise, will it be necessary to calculate one type of profitability or all at once?
Given the practices of enterprises, it is best to conduct a comprehensive analysis. This will help identify weaknesses in management or pricing policies.

How often should profitability be calculated?

I recommend conducting analysis with the appearance of verified reporting data. In any case, it's not difficult. There are simple scripts for Excel that will read data when substituting the initial parameters.

Are control values ​​really necessary and how often do they need to be updated?

Actually, the point of all calculations is comparison. For example, the company received the first values ​​of ROA, ROS, ROFA, ROI or ROE. But so far no one knows or understands whether this is good or bad. To begin with, you can compare the indicators with industry values ​​established at the regional level.

Next, you can look at the dynamics of ROA, ROS, ROFA, ROI or ROE, for example, when analyzing revenue. If with an increase in sales volumes there is a decrease in profitability, it means that there is an overexpenditure of material resources in production or contracts have been concluded with a more expensive supplier without the knowledge of the manager.

Where to get data to calculate enterprise profitability

All information necessary for making calculations is contained in the organization’s financial statements and balance sheet.

Despite the fact that the accounting department can follow the established regulations (submitting forms once a year), it is possible to generate intermediate documents.

In most cases, this allows you to calculate aggregated indicators. For details, you will need to make preliminary calculations, for example, the cost of each unit of the assortment. Based on the results of calculations, managers often remove unprofitable products from production.

The higher the profitability, the greater the profit

Theoretically yes. True, increased profitability may be due to natural factors. For example, if the book value of equipment becomes zero. This is an indicator that the equipment has been fully paid for or the loan for its purchase has expired.

In this case, you should pay attention to other indicators of the calculation series.

If today the profitability of one type of asset increases, then tomorrow the overall level may be adjusted, for example, due to the same modernization.

What does this mean: decreased profitability

Deterioration in indicators should be considered in a specific direction. In simple terms, it is the need for change. Otherwise, due to a decrease in profitability, the enterprise may enter a loss-making phase. In some cases, a worsening trend may be caused by adjustments or be tied to seasonality.

What is profitability of tax value

Among the persons who are interested in performance indicators are tax inspectorates. The federal agency systematically monitors industry averages and then publishes the figures. Exceeding the normative values ​​will mean at least two things:

• The company has undergone a change in pricing policy due to a sharp reduction in costs (decrease in quality);
• The organization manifests itself as an active tax evader.

Deviation from standard indicators usually leads to the inclusion of the company in the plan of unscheduled inspections. The director is then called to appear before the tax committee.

How to calculate the profitability of an enterprise at cost (ROTC)

Pricing plays a key role in the activities of an enterprise. Dumping (excessive reduction) is possible only for a short-term period, otherwise the company will simply go to a loss. An increase in the cost of goods will cause a correction on the part of competitors and will significantly reduce sales volumes.

In this case, again, you should focus on market averages and adjust internal factors, such as the cost of raw materials, depreciation of equipment.

The calculation formula will be as follows:

ROTC = P/C*100%, where P is profit and C is cost.

In practice, profitability calculations can be made from a ceiling value. For example, when calculating participation in a tender (public procurement), enterprises with their own production use a starting value of 200%. This is how the price fall limit is determined.

Otherwise, participation in the tender becomes unprofitable for most production organizations.

How to calculate the profitability of an enterprise on the balance sheet

The main source of data for calculating efficiency remains the company's accounting complex. Accounting reflects information about capital and assets on accounts; volumes of shipments, sales, and closing accounts receivable are accumulated in registers.

When working with a balance sheet, you must use line numbers. It remains the same regardless of the type of enterprise.

For example, to obtain the initial value for non-current assets, you will need to add the numbers on lines 1150 and 1170, fixed assets and financial investments, respectively. If the analysis is carried out at a medium-sized enterprise, you can take the finished value on line 190.

When calculating ROA, you can use the average value of the value of current assets (at the beginning and end of the period). Profitability will be calculated using the formula = Pr/(SOAnp+SOAkp)/2*100%.

ROCE

Efficiency of capital employed shows the return on an investor's investment. The ROCE indicator also takes into account own investments and loans (long-term liabilities).

Profitability is calculated as the ratio of EBIT (earnings including taxes and interest) to the type of capital.

Equity turnover

The equity capital turnover ratio is an indicator characterizing the speed of use of equity capital and reflects the efficiency of enterprise resource management.

The equity capital turnover indicator is used to assess various aspects of the functioning of an enterprise:

• The commercial aspect is the effectiveness of the sales system;
• Financial aspect - dependence on borrowed funds of the enterprise;
• The economic aspect is the intensity of use of equity capital.

The coefficient under consideration may be important for current and potential investors, partners, creditors, and also play an important role in terms of procedures for internal corporate assessment of management quality and business model analysis.

Equity turnover formula:

Working capital turnover = Revenue / Average annual cost of capital

Equity turnover on the balance sheet:

Equity turnover = line 2110 / 0.5 × (line 1300 at the beginning of the year + line 1300 at the end of the year)).

Where:

Page 2110 — revenue from form No. 2;

Page 1300 – line of the balance sheet (total line of section III “Capital and reserves”).

This indicator belongs to the group of business activity coefficients and there is no clearly accepted standard value for it.

A capital turnover ratio of 10 or higher indicates that the company's equity capital is being used effectively and that the company is generally doing well.

Low values ​​of the indicator (less than 10) reflect that the enterprise's own capital is not used effectively, and there are possible problems in the business.