Profitability - what it is, types and formulas, how to calculate and increase profitability. How to calculate return on sales: what is it and how is it calculated Return on sales based on net profit formula

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

Unlike indicators of return on sales, 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 with lower costs. The profitability threshold is the point separating profitable production from unprofitable ones, the point at which the enterprise’s income covers its variable and semi-fixed costs.

In a general sense, profitability includes a set of indicators that comprehensively characterize the efficiency (profitability) of a business.

Profitability is always the ratio of profit to that object, the analysis of the influence of the effect of which needs to be clarified. In fact, the formula for return on sales on the balance sheet determines the share of profit per unit of the object in question.

Using the formula for return on sales on the balance sheet, you can find out with what degree of efficiency equity capital (company assets), fixed and working capital, etc. is used.

Return on sales shows what part of the profit is in the organization's revenue. In the analysis, return on sales is denoted by ROS (from the English returnonsales).

General sales return formula as follows:

ROS = P / Qp * 100%,

Here ROS is return on sales;

P is the amount of profit;

Qп - sales volume (revenue).

Return on sales is a relative indicator, determined as a percentage.

Formula for return on sales on balance sheet

When calculating the profitability of sales on the balance sheet, information is taken from the financial results report (form No. 2).

In this case balance sheet return on sales formula depends on the type of profitability that users need:

• Gross Profit Margin:

  ROS=p.2100/p. 2110 * 100%

• Operating profit margin:

  ROS=(p.2300 + p.2330)/p. 2110 * 100%

• Net profit margin:

Standard value of return on sales

When calculating the profitability of sales, there are no specific standards, since the average statistical values ​​of profitability by industry are calculated. Each type of activity has corresponding norm coefficients.

In general, the formula for profitability of sales on the balance sheet should provide a profitability standard ranging from 20 to 30%, which reflects the high profitability of the enterprise.

An indicator of up to 5% indicates low profitability of the company, from 5 to 20% - average profitability, a profitability indicator of more than 30% indicates super-profitability.

Average return on sales by industry in our country:

• Agriculture – 10-13%,
• Mining – 25%,
• Construction – 5-10%,
• Trade – 7-8%.

Sales profitability analysis

The formula for profitability of sales on the balance sheet allows the administration of the enterprise to find out the degree of efficiency of the organization in the use of costs in the process of making a profit.

A cost-benefit analysis is needed in the following cases:

• Receipt and increase in profits;
• Control of company development;
• Conducting comparisons with competitors;
• Detection of profitable and unprofitable products, etc.

Examples of problem solving

EXAMPLE 1

EXAMPLE 2

Various profitability indicators help evaluate the efficiency of an enterprise. These ratios reflect how well a company is performing and, expressed as a percentage, allow for easy comparisons with competing organizations. One of these parameters is considered to be return on sales (ROS).

Return on sales is a ratio that shows the ratio of an enterprise's net profit to its total revenue.

It is noteworthy that this indicator can only be used in the context of the reporting period. It is not suitable for long-term forecasts.

Economic meaning of the indicator

Why might a return on sales ratio be needed? Like other similar indicators, it can clearly demonstrate the economic well-being of an enterprise, its business activity and competitiveness.

In simple terms, the coefficient can show what share of revenue from sales of products can be considered the net profit of the enterprise. Indeed, often, what may be much more important is not how much goods a company can sell, but how much net income it can receive from these sales.

Having determined the importance and practical usefulness of the ratio, it’s time to answer the questions - how to calculate return on sales, what formula is it used to determine, what does it show, and can the indicator be calculated from the balance sheet?

How to calculate the value

So, return on sales can be a very useful tool for analyzing a company’s financial performance and determining its future course of development, while it is calculated quite simply. The general formula for calculation can be presented as follows:

ROS = PE / TR,

where PE is the value of the enterprise’s net profit, TR is its revenue. Both of these values ​​can be found in the company’s financial documentation, or you can calculate it yourself.

Thus, revenue can be found by multiplying the price (P) by the number of units sold (Q). Some sources call this indicator sales volume:

TR = P * Q

Net profit can be represented as a more complex formula:

PP = TR – TC – PrR + PrD – N,

here TC (from Total cost) is the total cost, PrP is other expenses, PrD is other income, N is taxes. It is worth noting that, unlike other components of the formula, the value of other income is added to revenue.

For those who do not fully understand the meaning of other income and expenses, these indicators are characterized by the non-core activities of the enterprise, but since they have an impact on the overall financial picture of the company, they should definitely be taken into account in the calculations. This may include transactions with securities, exchange rate differences, participation in the activities of other enterprises through authorized capital, etc.

This calculation formula shows the return on sales based on net profit, while to determine other types of coefficient it is worth taking into account slightly different figures.

Types of profitability of sales

It is traditional to rely on the general value of the indicator, although narrower values ​​of the coefficients can be very useful for solving certain problems:
• By gross profit. Allows you to estimate how many kopecks of gross income are contained in each ruble of revenue. The coefficient is designated GPM (Gross Profit Margin) and is calculated as the ratio of gross profit to revenue:
  GMP = VP / TR,
  where VP is gross profit, TR is the value of revenue.
  In turn, VP = TR – TC, where TC is the total cost of production, and TR = P * Q, where P is the price and Q is the sales volume.
• By operating profit. This type of return on sales is expressed by the ratio of operating profit to sales volume in value terms. The formula for calculation is as follows:
  ROS = EBIT / TR,
  where EBIT (Earning before Interests and Taxes) is the value of operating profit, and TR is revenue.
  EBIT can be determined using data from the income statement. The formula for calculation can be presented as follows:
  EBIT = line 2300 (Profit (loss) before tax) + line 2330 (Interest payable)
• Based on profit before payment of mandatory taxes. The indicator is used as the main indicator to assess the financial efficiency of companies with relatively small amounts of fixed assets and equity capital.
  The formula can be represented as:
  ROS = EBI / TR.

It is worth considering that the gross profit margin ratio cannot fully characterize the financial well-being of an enterprise. The fact is that this indicator does not take into account some costs that no company can do without - commercial expenses (reflected in line 2210 of the financial results report) and administrative expenses (data from line 2220).

However, the ratio can be very useful. With its help, analysts can evaluate how well the services responsible for the purchase and sale of raw materials, materials or goods have worked.

The value of operating profit can be considered intermediate between the indicators of net profit and profit from sales.

Formula for calculating the balance

In the company's financial statements you can find all the necessary figures for the calculation. In the values ​​of the corresponding items of the old financial statements, the formula for calculating the profitability of sales on the balance sheet will look like this:

ROS = line 050 / line 010 * 100%

Based on the new sample financial statements, return on sales is calculated as the ratio:

ROS = line 2400 / line 2110 * 100%

In both cases, the numerator contains the value of profit (loss) from sales, and the denominator contains sales revenue.

Calculation example

An example of calculating the return on sales ratio can be analyzed using data from a specific company, the real name of which, in order not to create advertising for it, will be hidden under the name “Enterprise”. Data on the quarterly financial statements of the “Enterprise” were obtained from open sources - from the authoritative service InvestFunds:

The presented data allows you to accurately calculate the coefficient values ​​for each period:

ROS 4 sq. 2015 = 10,274,320 / 186,478,369 * 100% = 5.5%
ROS 1 sq. 2016 = 3,047,582 / 56,247,526 * 100% = 5.4%
ROS 2 sq. 2016 = 3,442,561 / 102,678,254 * 100% = 3.3%

It is clearly seen from the calculations that the indicator value remains positive at each time interval. This means that the company regularly makes a profit. However, not everything is so rosy. The company's sales margin has been steadily declining for three quarters. However, if in the 1st quarter of 2016 the decrease was only 0.1%, then by the 2nd quarter of 2016 the value of the coefficient had already decreased by 2.1%. Looking at these numbers, the company's analysts should be aware that if this trend continues, the company could be in big trouble.

Analysis of indicator values

Sales profitability increases

This trend is undoubtedly positive for any enterprise. Therefore, it is worth carefully understanding the reasons for the growth of the indicator and making every effort to maintain positive dynamics.

So, here are a few scenarios, the implementation of which may affect the growth of the coefficient:
• Revenue growth prevails over cost growth. This can be achieved by increasing sales volumes or changing the product range.
• Cost reductions are outpacing revenue declines. The reasons for this development of the situation may lie in a change in the structure of the range of products sold, or in rising prices. The improvement in product profitability in this case is rather formal in nature, and the general trend can hardly be called unambiguously positive. It is worth considering a thorough analysis of the assortment policy and pricing mechanism.
• An increase in revenue is recorded against the backdrop of a reduction in costs. The most favorable scenario, which is possible in the event of an increase in the cost of products, a revision of cost standards or the range of products produced for sale.

Sales profitability is declining

Various scenarios can also develop here:
• The growth of the company's revenue lags behind the growth of costs. A negative trend that may be a consequence of inflationary processes, increased cost standards, changes in product mix, or lower prices. A detailed analysis of assortment policy, pricing issues and cost control will help correct the situation.
• The rate of revenue decline exceeds the rate of cost reduction. This situation happens quite often, and it can be caused by a simple reduction in sales volumes. The enterprise, in this case, needs to revise its marketing policy.
• The organization's costs increase as revenue decreases. There may be several reasons for this - an increase in cost standards, a drop in prices, or a change in the product range. To level out the situation, it is worth conducting an audit of assortment policy, pricing and cost control.

What numbers should you focus on?

The level of return on sales ratios for different industries can vary quite significantly. For example, it would be absolutely incorrect to compare the indicator values ​​for a small construction organization and a large mining enterprise.

Average standard values ​​of return on sales by industry can be found both on the websites of the relevant departments and in reference literature.

In general, any positive value of the coefficient can be considered a normal indicator, although by industry the following figures are generally taken as a basis:
• Mining: 24-28%.
• Agriculture: 10-15%.
• Construction industry: 5-10%.
• Trade (wholesale or retail): 7-12%.

Return on sales measures how much of a company's revenue is profit.

The return on sales formula is calculated for a certain period of time, the unit of measurement is percentage. The general formula for finding return on sales is as follows:

Рп=(П/В)*100%,

where Рп – profitability of sales,

P – enterprise profit,

B is the company’s revenue.

Types of profitability of sales

When calculating return on sales, different types of profit are used, so there are different versions of the return on sales formula. Let's look at the most common types of return on sales:

• Return on sales in accordance with gross profit, which is calculated as the quotient of gross profit divided by revenue (in percent):

  Rp(VP)=(Pval/V)*100%

• Operating return on sales, which is the quotient of profit before tax divided by revenue (as a percentage):

  Rp(OP)=(Pop/V)*100%

• Return on sales in accordance with net profit, which is the quotient of net profit divided by revenue (in percent):

  Rp(ChP)=(Pch/V)*100%

What does the return on sales formula show?

Using the return on sales formula, you can find a coefficient that shows what part of the profit will come from each ruble earned. The values ​​​​found using the profitability formula will differ for each enterprise, since their product range and competitive strategies differ.

Most common three types of return on sales and they show:

• Gross profit margin shows how many percent of gross profit is in each ruble of goods sold;
• Operating return on sales will show what share of profit will be accounted for for each ruble that is received from revenue from which interest and taxes have been paid;
• Return on sales based on net profit reflects what share of net profit will fall on each ruble earned.

Determining the profitability of sales helps to optimize the pricing policy of the enterprise, as well as costs that relate to commercial activities.

The meaning of the return on sales formula

Return on sales is often called the profitability rate, since this indicator reflects the share of profit in revenue.

When analyzing the coefficient that characterizes the profitability of sales, it is important to note that if the profitability of sales decreases, this indicates a decrease in the competitiveness of the product and a decrease in demand for it. Then the company’s management should think about carrying out events that help stimulate demand, increase the quality of products sold, or conquer a new niche in the market.

By identifying trends in changes in the profitability of sales over time, economists distinguish between the reporting and base periods. As the base period, the indicators of previous years (years) when the company received the greatest profit are used. Determining the base period is necessary to compare the return on sales ratio for the reporting period with the ratio that is taken as the basis.

Examples of problem solving

EXAMPLE 1

EXAMPLE 2

Any activity related to sales is carried out with the aim of making a profit. It is the actual sale that provides income to the business, because at this stage the company receives money from the client. Profit, in turn, is the main goal of business as such. In order to achieve it, it is not enough to simply make sales. They need to be profitable. Simply put, they are effective. Assessing profitability of sales is a comprehensive approach, which we will talk about.

Definition of “profitability”

Return on sales, or return on sales ratio, is an indicator of the financial performance of a company, demonstrating what portion of its revenue is profit.

If we express this concept as a percentage, then profitability is the ratio of net income to the amount of revenue received from the sale of manufactured products, multiplied by 100%.

Thanks to the profitability indicator, one gets the impression of the profitability of the enterprise’s sales process or how much the products sold pay for the costs of their production. Thus, the costs include: the use of energy resources, the purchase of necessary components, and staff working hours.

When calculating the profitability ratio, the volume of capital of the organization (volume of working capital) is not taken into account. Thanks to the data obtained, you can calculate how successfully competing enterprises operate in your field of activity.

What does profitability ratio mean?

Thanks to this indicator, you can find out how profitable the company's activities are. You can also calculate what share falls on the cost price after the products have been sold. Having an idea of ​​the profitability of sales of its products, the company can control all costs and expenses, as well as adjust its pricing policy.

Important! Different manufacturing companies produce a wide variety of products, and to sell them they also use different strategic and tactical ways and advertising techniques, therefore the value of their profitability ratios will be different. Even if two firms producing goods received the same revenue and profit, and also spent the same amount on production, then after deducting tax costs, their profitability ratio will be different.

Also, the planned effect of long-term investments will not be a direct reflection of profitability. If an enterprise decides to improve the production technological cycle or purchase new equipment, then for some time the resulting coefficient may decrease significantly. However, if the sequence of introduction of new technologies and equipment at the enterprise was determined correctly, then over time the company will demonstrate increasing profitability indicators.

How is return on sales calculated?

To calculate the profitability of sales, use the following formula:

ROS = NI/NS * 100%

• ROS— Return on Sales – profitability ratio, expressed as a percentage.
• NI— Net Income – data on net profit expressed in monetary terms.
• N.S.— Net Sales - the amount of profit that the company received after selling products, expressed in monetary terms.

If the initial data is correct, then the resulting formula will allow you to calculate the real return on sales and find out how profitable your company is.

Calculation of a company's profitability using an example

When starting calculations, it is necessary to remember that using a general formula you can find out how effective or ineffective the enterprise’s activities are, but it will not allow you to find out in which part of the production chain there are problems.

For example, a company analyzed its activities and received the following data:

In 2011, the company made a profit of 3 million rubles, in 2012 the profit was already 4 million rubles. The amount of net profit in 2011 amounted to 500 thousand rubles, and in 2012 – 600 thousand rubles.

How can you find out how much profitability has changed over two years?

Calculations show that in 2011 the profitability ratio was:

ROS 2011 = 500000/3000000 * 100% = 16.67%

ROS 2012 = 600000/4000000 * 100% = 15%

Let's find out how much profitability has changed over the estimated time:

ROS = ROS2012 – ROS2011 = 15-16.67 = - 1.67%

Calculations showed that in 2012 the company's profitability decreased by 1.67%. The reasons for the decline in profitability are not yet clear, but they can be found out if you conduct a more detailed analysis and calculate the following indicators:

1. The change in tax costs that is needed to calculate NI.
2. Calculation of profitability of manufactured goods. Produced according to the following formula: Profitability = (revenue - cost - expenses) / revenue 100%.
3. Profitability of sales personnel. For this, the formula is used: Profitability = (revenue - salary - taxes) / revenue 100%.
4. Advertising profitability of manufactured products. It is calculated using the following formula: Profitability = (revenue - advertising costs - taxes)/revenue * 100%.

When calculating these indicators, it is necessary to take into account the following features of the production process:

1. If the company is engaged in the provision of services, then the cost includes: organizing workplaces for sales specialists. For example, you need to purchase computers. Rent a room, allocate a telephone line, pay for advertising, purchase software for work and pay for a virtual PBX.
2. When calculating the profitability of sales specialists, you can use a fairly simple formula - divide gross profit by total revenue. But it is better to use it when working with specific indicators: the profitability of each specialist, a specific type of product, or a section on the website.

What factors influence profitability of sales?

You can increase the profitability of sales if you reduce the cost and level of expenses. However, this must be done thoughtfully and carefully, since such savings may reduce product quality or negatively affect the work of staff. To avoid this, you should take a comprehensive approach to the issue of increasing profitability and study the following aspects:

• Staff efficiency.
• Sales channels.
• Competing companies.
• Sales and cost process.
• Efficiency of working with CRM.

Once these components of the business have been studied, you can move on to developing sales strategies and tactics. It is also important to understand how profitable each group of products is individually.

For example, a company offers clients three types of real estate for rent:

• Residential.
• Warehouse.
• Office.

Having applied calculations, we obtained the highest rates of return on sales for residential real estate, so we can increase the costs associated with this group of services, as they will pay off.

Increasing profitability in many cases also depends on the human factor, for example, on the level of employees involved in the production process, so the business owner needs to pay attention to:

• Effective use of specialist knowledge.
• Improvement of employee qualifications.
• Optimizing costs for specialists who are not directly involved in the production process.
• Introduction of automated systems and innovative technologies.

Profitability may also depend on the industry. Thus, the heavy engineering industry shows a slow increase in sales profitability, and the highest rates can be observed in the trade or mining industries. For example, in 2014, the highest profitability indicators were noted in the chemical industry - 16.7% and in the field of subsoil development - 24-33%.

Profitability is influenced by the following features of the enterprise:

• Seasonality of sales.
• What activities does the company engage in?
• The area in which the company sells its products (regional characteristic).

Ways to increase profitability

The profitability indicator does not always meet the expectations of business owners. In this case, it is important to find the reasons for low profitability and ways to eliminate these reasons. There are many options for getting out of the situation; we tried to highlight the main ways to increase the profitability of sales.

We reduce costs. Reducing the cost of goods is the best incentive for profit growth. The main thing is not to do this at the expense of quality. It’s better to optimize logistics, work on the professionalism of managers, and negotiate more favorable terms with the supplier.

We are raising prices. A difficult step that few are willing to take. Despite the fact that indecision in this matter is precisely the main mistake. Dumping is the path to killing business. Prices can and should be raised. You just need to do this wisely. Firstly, no sudden jumps. Secondly, be sure to warn customers ahead of time that prices are about to increase. This is an unspoken rule of good manners and a way to maintain trust in yourself and your company.

We focus on the client. For any product, the main thing is not the price, but the value that it represents for the buyer. The sales description should describe in detail what the main advantage of the product is, what problems it helps to solve, etc. This should be information that will force the client to buy the product right here and now. If a person understands that you are really giving him the best offer, then raising the price will fade into the background for him. Naturally, for our part we need to ensure good quality of goods and service. No sales text will help you if you don’t properly organize delivery or if you sell outright nonsense to people. And on the contrary, with a loyal attitude, a person will become your regular customer.

And achieving a loyal attitude is simple: meet halfway where it is appropriate. If the buyer needs extra-urgent delivery, implement it. A person is dissatisfied with a purchase (for objective reasons) - offer a refund, replacement or small compensation at your discretion.

People appreciate not only a professional, but also a human approach. Which ultimately has a positive effect on profitability of sales.

We sell related products. Standard situation: a manager at a hardware store, after purchasing a laptop, offers to take a spray to clean the monitor. A trifle, and one that you were unlikely to initially intend to buy. Nevertheless, many agree. And all because this little thing will really be useful for them. Analyze which items from your assortment can go with the main product and offer them to the buyer. In online stores, this technique is usually used by the block “Buy with this product.”

P.S. This method is also suitable for b2b sales. Here, your main task will be to convey to your partner that the additional product will give more sales to his company first of all. As an argument, you can use example statistics on other partners.