The profitability of production is determined by the profit ratio. Product profitability

Profitability- a relative indicator of economic efficiency. The profitability of an enterprise comprehensively reflects the degree of efficiency in the use of material, labor, monetary and other resources. The profitability ratio is calculated as the ratio of profit to the assets or flows that form it.

In a general sense, product profitability implies that the production and sale of a given product brings profit to the enterprise. Unprofitable production is production that does not make a profit. Negative profitability is an unprofitable activity. The level of profitability is determined using relative indicators - coefficients. Profitability indicators can be divided into two groups (two types): and return on assets.

Return on sales

Return on sales is a profitability ratio that shows the share of profit in each ruble earned. It is usually calculated as the ratio of net profit (profit after tax) for a certain period to the sales volume expressed in cash for the same period. Profitability formula:

Return on Sales = Net Profit / Revenue

Return on sales is an indicator of a company's pricing policy and its ability to control costs. Differences in competitive strategies and product lines cause significant variation in return on sales values ​​across companies. Often used to evaluate the operating efficiency of companies.

In addition to the above calculation (return on sales by gross profit; English: Gross Margin, Sales margin, Operating Margin), there are other variations in calculating the return on sales indicator, but to calculate all of them, only data on the profits (losses) of the organization are used (i.e. e. data from Form No. 2 “Profit and Loss Statement”, without affecting the Balance Sheet data). For example:

• return on sales (the amount of profit from sales before interest and taxes in each ruble of revenue).
• return on sales based on net profit (net profit per ruble of sales revenue (English: Profit Margin, Net Profit Margin).
• profit from sales per ruble invested in the production and sale of products (works, services).

Return on assets

In contrast to return on sales indicators, return on assets is calculated as the ratio of profit to the average value of the enterprise's assets. Those. the indicator from Form No. 2 “Income Statement” is divided by the average value of the indicator from Form No. 1 “Balance Sheet”. Return on assets, like return on equity, can be considered as one of the indicators of return on investment.

Return on assets (ROA) is a relative indicator of operational efficiency, the quotient of dividing the net profit received for the period by the total assets of the organization for the period. One of the financial ratios is included in the group of profitability ratios. Shows the ability of a company's assets to generate profit.

Return on assets is an indicator of the profitability and efficiency of a company's operations, cleared of the influence of the volume of borrowed funds. It is used to compare enterprises in the same industry and is calculated using the formula:

Where:
Ra—return on assets;
P—profit for the period;
A is the average value of assets for the period.

In addition, the following indicators of the efficiency of using certain types of assets (capital) have become widespread:

Return on equity (ROE) is a relative indicator of operational efficiency, the quotient of dividing the net profit received for the period by the organization’s equity capital. Shows the return on shareholder investment in a given enterprise.

The required level of profitability is achieved through organizational, technical and economic measures. Increasing profitability means getting greater financial results at lower costs. The profitability threshold is the point that separates profitable production from unprofitable ones, the point at which the enterprise’s income covers its variable and semi-fixed costs.

Evgeniy Malyar

Bsadsensedinamick

# Business Dictionary

Definition, formula, examples

Article navigation

• What is production profitability? Calculation formula
• What limits production profitability
• Advantage of the ROTC Method
• External application of the ROTC indicator
• Disadvantages of the ROTC Calculation Formula
• Where to get data from
• Conclusions

The profitability of an enterprise is assessed according to various criteria, among which the ROTC indicator, based on an assessment of the share of the product cost in the amount of revenue, is of great importance. This relative coefficient, which we often call production profitability, will be discussed in this article.

What is production profitability? Calculation formula

The English abbreviation ROTC stands for Returns Over Total Costs (returns exceeding total costs) and quite accurately defines the essence of the indicator. There is a sum of costs associated with the production of a particular product - they need to not only be returned, but also made a profit.

The formulation that can be found in any textbook on economics, if not literally, then in meaning corresponds to this term.

Profitability of production is defined as the ratio of total profit to the average annual (or semi-annual) costs of an enterprise for basic production and standardized working capital.

ROTC = P/PNC

Where:
ROTC – production profitability;
P – total (balance sheet) profit;
PNC is the sum of production costs that make up the gross cost of the manufactured product for the reporting period. This value is precisely formed by the costs of basic production and regulated working capital.

We can immediately give a clear example illustrating the indicator in its simplest form:

The head of an enterprise producing dumplings wants to quickly and in the simplest way assess the profitability of his production. You can do this based on the objective figures contained in the balance sheet by asking your accountant for data on production costs and profits for the last reporting period. The second option is to compare (correlate) the cost of a kilogram of product with the profit brought by its sale.

To do this, you should first determine, guided by the recipe and prices for ingredients, the unit cost of the vehicle(y):

To this amount it is necessary to add all other production costs, reduced to the unit of measurement of the product (in this case, a kilogram). This requires data on productivity per shift and costs for:

• Remuneration of personnel;
• Workshop rental;
• Electricity;
• Water supply and drainage;
• Advertising;
• Equipment maintenance.

And other costly items. For example, knowing how many kilograms of dumplings are produced per hour and dividing the amount of wages by this figure, you can get the “salary” component, expressed in rubles. The daily consumption of electricity and water is also distributed in the cost price.

In order not to bore the reader with long calculations, you can take the given costs in the amount of 35 rubles per kilogram.

In total, the cost per kilogram will be 190.11 rubles/kg. The profitability of dumpling production is calculated using the formula:

ROTC = P / PNC which means: 74.89 / 190.11 = 0.39 or 39%

Using the same method, the profitability of the production of any other product is calculated: cinder blocks, bread, televisions, cars or computers.

It should be noted that the raw material component, as a rule, is the largest, and it forms the material intensity (in particular, metal intensity) of production.

In the case of a bakery and bakery, the main ingredients (flour, in some recipes butter and eggs) will cost more than other cost components.

Labor-intensive processes are characterized by the prevalence of labor costs (for example, the production of cinder blocks).

What limits production profitability

Opinions differ about what kind of profitability is considered normal in production, although, of course, all business executives agree with the attitude “the more, the better.” It is important to understand that this indicator, taken in isolation from other costs of the enterprise, will always be higher than the overall profitability.

There are many limitations that prevent unlimited profit increases:

• Competition in the market and the availability of alternative offers;
• Antimonopoly legislation;
• Fiscal public policy;
• Level of solvency of the population and overall market capacity;
• Limited resource base;
• An increase in the price of raw materials in the event of an increase in demand for them.

And other circumstances that do not allow a businessman, no matter what he does, to get rich endlessly.

Advantage of the ROTC Method

The advantage of the production profitability ratio is the relative simplicity of its calculation. This makes it possible to analyze not only the entire enterprise as a whole, but also its individual components (shops, sections, branches, etc.), identifying the most promising areas and abandoning low-income activities.

In practice, large enterprises calculate ROTC once every six months. The dynamics of changes show which management decisions lead to increased profitability and which do not lead to a positive effect.

External application of the ROTC indicator

In addition to its internal economic significance, production profitability is important as a market instrument:

• ROTC can serve as a criterion for comparing the economic success (or lagging) of a given enterprise with that of its closest competitors.
• Potential investors can judge the feasibility of financial investments and predict their benefits based on the profitability of production.
• If there is a need to sell the enterprise, the high profitability of its production increases liquidity and the price of assets.

Disadvantages of the ROTC Calculation Formula

The formula for calculating production profitability given in the previous section is simple and understandable, but it has a significant drawback. It is difficult to use if the cost is formed not by several components, as in the case of dumplings or cinder blocks, but by hundreds or thousands of figures. How do you find an airplane ROTC, for example? However, a simpler example (computer, car, TV) will also confuse an economist who decides to calculate this coefficient manually or using an Excel spreadsheet. The difficulty lies in the most common technical aspect. How to calculate the cost of all components and other costs included in the cost price? For a large or medium-sized enterprise specializing in production, the answer suggests itself: on the balance sheet.

Where to get data from

In fact, the situation is not as dramatic as it seems. All the necessary information is in the balance sheet. The profitability level is calculated using the formula: ROTC = P / PNC

Therefore, only two figures are needed: book profit P and the total cost of goods (products, works or services) PNC.

Balance sheet profit is taken from the line “Profit (loss) before tax” of Form 2 in line 2300.

The full cost is determined using line 020 “Cost of goods, products, works, services sold.” The amount includes expenses associated with normal activities, such as:

• Manufacturing of products;
• Purchase of goods;
• Performance of work and provision of services;
• Providing property for rent;
• Granting of intellectual property rights;
• Other.

As for management expenses, they can be accounted for as general business expenses (account 26) or included in the cost price directly (write-off from account 26 to Dt account 90, subaccount 90-2).

Conclusions

The production profitability indicator characterizes the efficiency of using basic production and regulated working capital.

The basis for calculating this coefficient is the cost of production.

The value of the ROTC indicator does not depend on the turnover of the enterprise, its size, number of personnel and asset value: it is relative. The products of a small company can be produced at a higher level of profitability than in a large plant.

Non-production costs are distributed into the cost evenly and in proportion to the volume of output.

The greatest influence on the profitability of production is exerted by the cost of raw materials (material intensity) and labor costs (labor intensity).

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The coefficient is equal to the ratio of balance sheet profit to the average annual cost of fixed production and standardized working capital. In other words, the indicator represents the amount of profit per each ruble of the cost of products sold (production expenses). The initial data for the calculation is the balance sheet.

The calculation and analysis of the indicator is done by the FinEkAnalysis program in the Analysis and assessment of profitability and profitability block.

Production profitability - what it shows

Reflects the economic efficiency of a business or its division. Profitability of production shows how effectively the property of the enterprise is used.

Production profitability - formula

Formula for calculating the coefficient:

Calculation formula based on the new balance sheet:

Production profitability - meaning

The increase in value is related to:

• with a reduction in production costs,
• with increasing product quality,
• with an increase in profit.

A decrease may indicate:

• increase in production costs,
• deterioration in product quality,
• deterioration in the use of production assets.

Production profitability - diagram

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To analyze and calculate the efficiency of an enterprise, a wide range of economic and financial indicators is used. They differ in the complexity of calculation, availability of data and usefulness for analysis.

Profitability is one of the optimal performance indicators - ease of calculation, availability of data and enormous usefulness for analysis make this indicator a must-have for calculation.

What is enterprise profitability

Profitability (RO – returnon)– a general indicator of the economic efficiency of an enterprise or the use of capital/resources (material, financial, etc.). This indicator is necessary for analyzing economic activities and for comparison with other enterprises.

Profitability, unlike profit, is a relative indicator, so the profitability of several enterprises can be compared with each other.

Profit, revenue and sales volume are absolute indicators or economic effects and it is incorrect to compare these data from several enterprises, because such a comparison will not show the true state of affairs.

Perhaps an enterprise with a smaller sales volume will be more efficient and sustainable, that is, it will bypass another enterprise in terms of relative indicators, which is more important. Profitability is also compared with efficiency(efficiency factor).

In general, profitability shows how many rubles (kopecks) of profit one ruble invested in assets or resources will bring. For profitability of sales, the formula reads as follows: how many kopecks of profit are contained in one ruble of revenue. Measured as a percentage, this indicator reflects the effectiveness of activities.

There are several main types of profitability:

• profitability of products/sales (ROTR/ROS – total revenue/sale),
• return on cost (ROTC – total cost),
• return on assets (ROA – assets)
• return on investment (ROI – invested capital)
• personnel profitability (ROL – labor)

The universal formula for calculating profitability is as follows:

RO=(Type of profit/Indicator whose profitability needs to be calculated)*100%

In the numerator, the type of profit is most often used profit from sales (from sales) and net profit, but it is possible to calculate balance sheet profit and. All types of profit can be found on the income statement (profit and loss).

The denominator is the indicator whose profitability needs to be calculated. The indicator is always in monetary terms. For example, find the return on sales (ROTR), that is, the denominator should include the sales volume indicator in value terms - this is revenue (TR - total revenue). Revenue is found as the product of price (P – price) and sales volume (Q – quantity). TR=P*Q.

Formula for calculating production profitability

Return on cost (ROTC – returnontotalcost)– one of the main types of profitability necessary for efficiency analysis. Cost profitability is also called production profitability, as this indicator reflects the efficiency of the production process.

Production profitability (cost) is calculated using the following formula:

ROTC=(PR/TC)*100%

The numerator contains profit from sales/sales (PR), which is the difference between income (revenue - TR - totalrevenue) and expenses (total cost - TC - totalcost). PR=TR-TC.

In the denominator, the indicator whose profitability needs to be found is the total cost (TC). The total cost consists of all the costs of the enterprise: costs of materials, semi-finished products, wages of workers and administrative and management personnel, electricity and other housing and communal services, shop and factory costs, costs of advertising, security, etc.

The largest share of the cost is made up of materials, which is why the main industries are called material-intensive.

Return on cost shows how many kopecks of profit from sales will be brought by one ruble invested in the cost of production. Or, measured as a percentage, this indicator reflects how efficient the use of production resources is.

Formula for calculating profitability on balance sheet

Many types of profitability are calculated based on balance sheet data. The balance sheet contains information about the assets, liabilities and equity of an organization.

This form is compiled 2 times a year, that is, the status of any indicator can be viewed at the beginning of the period and at the end of the period. To calculate profitability from the balance sheet, the following indicators are required:

• assets (current and non-current);
• the amount of equity capital;
• volume of investment;
• etc.

You cannot simply take any of these indicators and calculate profitability - this is wrong!

In order to correctly calculate profitability, you need to find the arithmetic average of the amount of the indicator at the beginning of the current (end of the previous) and the end of the current period.

For example, find the profitability of non-current assets. The sum of the values ​​of non-current assets at the beginning and end of the period is taken from the balance sheet and divided in half.

In the balance sheet of medium-sized enterprises, the value of non-current assets is reflected in line 190 - Total for section I; for small enterprises, the value of non-current assets is the sum of lines 1150+1170.

The formula for return on non-current assets is as follows:

ROA (in) = (PR/(VnA np + VnA kp)/2)*100%,

where VnA np is the value of non-current assets at the beginning of the current (end of the previous) period, VnA kp is the value of non-current assets at the end of the current period.

The return on non-current assets shows how many kopecks of profit from sales one ruble invested in non-current assets will bring.

Example of calculating production profitability

To calculate the profitability of production, the following indicators are required: total cost (TC) and profit from sales (PR). The data is presented in the table.

PR 1 =TR-TC=1500000-500000=1,000,000 rubles

PR 2 =TR-TC=2400000-1200000=1,200,000 rubles

Obviously, the second enterprise has higher revenue and profit from sales. When measured in absolute terms, the effect of the second enterprise is higher. But does this mean that the second enterprise is more effective? To answer this question, production is necessary.

ROTC 1 =(PR/TC)*100%=(1000000/500000)*100%=200%

ROTC 2 =(PR/TC)*100%=(1200000/1200000)*100%=100%

The profitability of production of the first enterprise is 2 times higher than the profitability of production of the second enterprise. We can confidently say that the production of the first enterprise is 2 times more efficient than that of the second.

Profitability, as an indicator of the efficiency of an enterprise, more accurately reflects the real state of affairs in production, sales or investment of the enterprise, allowing you to correctly respond to the current situation, in contrast to the use of absolute indicators, which do not give a complete picture.

Video about what profitability shows:

The desired result of every enterprise is profit. However, profit in absolute terms (in rubles, thousands or millions) is just a number on the income statement. For the owner or investor, it is, of course, important, but not informative enough. In order to understand how hard this profit was obtained, there are relative indicators of profitability, called profitability indicators. One of them is production profitability.

Profitability of production correlates the amount of profit received with the amount of funds that made it possible to obtain it, shows the amount of profit per 1 ruble. spent production assets. The fewer funds are used to obtain a certain amount of profit, the higher the profitability of production, and therefore the higher the efficiency of the company.

Read our articles about other profitability indicators:

• “We determine return on assets (balance sheet formula)”,
• “Determining return on equity (formula).”

Production profitability formula

Profitability of production is the ratio of the total amount of profit (balance sheet profit) to the average annual cost of fixed and working capital.

The formula for calculating production profitability is as follows:

Rproduct = Pr / (OF + ObS) × 100,

Rproduct—production profitability;

PF - average cost of fixed production assets for the billing period;

OBC is the average cost of working capital.

Where to get the numbers for calculations

Information for calculating production profitability is taken partly from financial statements and partly from accounting analytics.

Thus, we obtain the amount of balance sheet profit from the financial results statement - from line 2300 “Profit (loss) before tax” of Form 2.

Read more about this report in the article “Filling out Form 2 of the balance sheet (sample)” .

Data for the denominator of the fraction will most likely have to be found in analytical accounting registers. It is unlikely to be possible to take figures from the balance sheet. For example, because it reflects aggregate data on the enterprise’s fixed assets, and to calculate the profitability of production, the balances of production assets are needed. This means that detailed information about the OS is needed.

Production profitability, product profitability and sales profitability - is there a difference?

Of course there is. These are separate types of profitability, three independent indicators. It has already been said above that production profitability shows the share of profit per 1 ruble. spent production assets.

In turn, product profitability shows the amount of profit per 1 ruble. cost (full or production). It is calculated using the formula:

Rpr = Pr / Ss × 100,

where: Rpr - product profitability;

Pr - profit;

CC - cost price.

As for the profitability of sales (it is also called total profitability), it carries information about the amount of profit per 1 ruble. revenue. It is calculated using the formula:

ROS = Pr / Op × 100%,

where: ROS - return on sales;

Pr - profit;

Op - sales volume or revenue.

As you can see, the indicators really differ both in meaning and in calculation. And they should not be confused.