Calculate profitability on the income statement. How to calculate profit margin
It describes the final (net) performance of the organization.
The indicator reflects the share of net profit (loss) in the company's revenue.
Calculation formula (according to reporting)
Line 2400 / line 2110 of the income statement * 100%
Standard
Not standardized
Conclusions about what a change in indicator means
If the indicator is higher than normal
Not standardized
If the indicator is below normal
Not standardized
If the indicator increases
Positive factor
If the indicator decreases
Negative factor
Notes
The indicator in the article is considered from the point of view not of accounting, but of financial management. Therefore, sometimes it can be defined differently. It depends on the author's approach.
In most cases, universities accept any definition option, since deviations in different approaches and formulas are usually within a few percent at most.
The indicator is considered in the main free service and some other services
If you see any inaccuracy or typo, please also indicate this in the comment. I try to write as simply as possible, but if something is still not clear, questions and clarifications can be written in the comments to any article on the site.
Best regards, Alexander Krylov,
The financial analysis:
- Definition Profitability of core activities is the ratio of profit (loss) from sales to revenue. The indicator characterizes the share of profit (loss) received by the organization in its core activities. That…
- Definition Return on sales is an indicator characterizing the level of gross profit (loss) in revenue. It describes the basic performance of an organization. It can be considered the markup level of the enterprise...
- Definition Retained earnings (uncovered loss) 1370 is the amount of retained earnings or uncovered loss of an organization. It is equal to the amount of net profit (net loss) of the reporting period, i.e....
- Definition Other 2460 - these are other indicators that influence the amount of the organization’s net profit: taxes paid when applying special tax regimes, penalties and fines, surcharges for...
- Definition Deferred tax assets 1180 are an asset that will reduce income taxes in future periods, thereby increasing after-tax profits. The presence of such an asset...
- Definition Net profit (loss) 2400 is net profit(loss) of the organization, i.e. retained earnings (uncovered loss) of the reporting period Net profit (loss) is the result of the organization’s activities...
- Definition Current income tax 2410 is the amount of income tax generated according to tax accounting for the reporting (tax) period. In the site services the meaning of this...
- Definition Borrowed funds 1410 are long-term (for a period of more than 12 months) loans and borrowings received by an organization. An organization can transfer reporting to short-term reporting when the deadline...
- Definition Other liabilities 1450 are other liabilities of the organization, the maturity of which exceeds 12 months, which are not included in other groups of the 4th section of the balance sheet. Their presence...
- Definition Earnings before taxes (EBT) - profit (loss) before taxes. For analysis, we can consider the line analogue of profit (loss) before tax (2300)…
The profitability indicator is extremely important for analyzing the efficiency of an enterprise in a specific period. V general view reflects the relationship of one indicator to another.
Return on sales reflects the performance of the enterprise in the reporting period. This indicator is not suitable for medium- and long-term planning.
Formula for calculating return on sales
Return on sales reflects what share of the company's revenue (income) is profit. Traditionally, the share of net profit in revenue is calculated, but to solve specific practical problems it is possible to find the share of gross, balance sheet and other types of profit in revenue.
By gross profit
The profitability of sales based on gross profit is called GrossProfitMargin and is calculated as the ratio of gross profit to revenue. This profitability is called gross return on sales.
GPM=VP/TR,
where VP – , TR – revenue. This profitability reflects how many kopecks of gross profit are contained in one ruble of revenue.
The gross profit indicator is indicated in the income statement. The gross profit value can be found using the formula:
where TC is the total cost.
Revenue is found as the product of price (P - price) and sales volume (Q - quantity):
By operating profit EBIT
Return on sales based on operating profit is called Return on Sales and is calculated as the ratio of operating profit to revenue (sales volume in value terms - TR - Total Revenue). Return on sales based on operating profit is called operating return on sales.
ROS=EBIT/TR,
where EBIT is operating profit (Earnings before Interests and Taxes), TR is revenue. This profitability reflects how many kopecks of operating profit are contained in one ruble of revenue.
The amount of operating profit must be calculated based on the items in the financial results statement using the formula:
EBIT = line 2300 “Profit (loss) before tax” + line 2330 “Interest payable”.
It is an intermediate indicator between sales profit and net profit.
We have already looked at the main indicators.
What formula is used to calculate return on assets in one of the articles.
Return on sales - balance sheet formula
The return on sales indicator can be calculated using balance sheet data using the formula:
RP = profit (loss) from sales / revenue (net) from sales
RP = line 050 / line 010 f. No. 2,
where line 050 is profit/loss from sales (in form No. 1 - the enterprise’s balance sheet), line 010 is revenue (net) from sales (in form No. 2 - the financial performance statement).
RP = line 2200 / line 2110,
where line 2200 is profit/loss from sales, line 2110 is revenue from sales.
Return on sales calculated using data financial statements, reflects the share of profit from sales in the company's revenue.
Net return on sales
Net return on sales is also called return on sales based on net profit is called Net Profit Margin and is calculated as the ratio of net profit to revenue (sales volume in value terms - TR - Total Revenue). This is how many kopecks of net profit are contained in one ruble of revenue.
NPM=NP/TR,
where PE is net profit, TR is revenue. Both figures can be found on the income statement. You can calculate your net profit and revenue yourself.
P – price, Q – number of units sold (sales volume – quantity).
PE=TR-TC-Pr+PrD-N,
where net profit is defined as revenue minus total cost (TC – Total cost), other expenses, taxes and adding other income. Other income and expenses depend on the non-core activities of the enterprise - these are exchange rate differences, purchase/sale valuable papers, participation in the activities of other enterprises through authorized capital etc.
Return on sales must be calculated for share analysis various types profit in revenue. This indicator, calculated over several periods, allows us to identify profit dynamics and quickly make changes to activities to improve profitability indicators.
There are no clear standard values for profitability of sales - the standard value of the indicator largely depends on the specifics of the activity.
Video - return on sales: formula, example of calculation and analysis
Discussion (5)
Calculating profitability is a necessary matter, but, unfortunately, many people neglect this, and as a result, numerous bankrupt enterprises appear. And why? Yes, because many entrepreneurs lack economic knowledge in such matters. Specific formulas will help with this not an easy task. After all, in business it is important to calculate every step you take, and assessing profitability is one of the most important points in understanding how successful your business is.
You helped me calculate profitability for key types of profit when passing pre-graduate practice at the home enterprise PJSC Irkut. Due to the “delicate point”, the profitability indicators are annual, as well as the relative change for the reporting periods (year). Meanwhile, they have been negative SINCE 2012. There is something to think about, especially since we are talking about an enterprise that produces combat fighters that are not inferior to their world counterparts from developed countries.
I was involved in transport and forwarding activities and had never bothered with formulas like these before. I always calculated the revenue and profitability of the business, roughly speaking, “on my fingers.” In principle, profitability formulas are interesting, although not in all areas. They may not take root in the service sector, but in the area wholesale trade they are necessary. Especially in those areas where you need to take into account several indicators per expense item.
When I opened my own business (catering), I calculated my profits differently. The result is a negative year, and almost complete ruin. Then, of course, recalculation and additions. Business has taken a slightly positive turn. I calculated everything from scratch, for almost each of the above, and brought the income to net profit. Of course, if I were more experienced, I would immediately take advantage of it, but we learn from mistakes. When opening or expanding a business, it is imperative to fully calculate income and expenses. Especially large enterprises They may simply “not survive” in the market without accurate calculations.
Of course, it is necessary to calculate these indicators at the enterprise! After all, many organizations, especially those related to small and medium-sized businesses, simply do not keep data on the formation of profitability - this must be recognized))) But in fact, this is an integral part of doing business in any area of business. Moreover, for each sulfur these indicators are relative. By the way, as for small businesses, of course, not all indicators will be useful to us, and this is understandable... All trading enterprises that deal various kinds types of transactions for the sale of something, use calculations of profitability of sales formulas. I myself work in a wholesale trading company, we sell food products. So, all of the above indicators are extremely useful to us and we use them when compiling reports.
This economic category was introduced to describe how efficiently an enterprise's operations are conducted overall. , or by individual components. For example, according to working capital. It helps you understand how many kopecks you can get by investing one ruble in a particular business. If we talk about sales efficiency, then profitability shows the share of profit in revenue.
To determine the indicator you need to use . The main thing is to remember that there are several of them, one for each type of indicator:
- The general level of the indicator is calculated as follows. All income received, constituting the balance sheet profit, is divided by the result of adding the average price by current assets, and average price category main part in production. We multiply the result of previous actions by one hundred percent.
- Selling profitability is highlighted separately.
PP = dividing income from the sale of goods by net profit after all operations. It is impossible to do without introducing a standardized average value bar. It will help summarize many calculations that have already been made. This produces a special number with an average result. - By assets. To determine net production income, divide it by the value of assets in a given time period.
- By investment. in its pure form is divided into reserves equity, to which are added liabilities designed to last for a long time.
- In terms of capital available to the enterprise. To calculate the net profit, divide it by the entire amount of savings.
Definition of Negative Profitability
For managers, a negative profitability indicator is an important signal. It shows how unprofitable the production turned out to be in a particular case. Or a negative result on sales of a certain product. Negative profitability occurs with higher production compared to a decrease in operating profit. And the total price is not enough to cover all production costs.
The greater the negative profitability according to absolute data, the greater the deviation of the price level from the equilibrium value that could be considered effective.
Negative profitability shows that management is not effectively using available funds.
What indicators are considered acceptable?
To protect itself, each enterprise must conduct inspections of its main facilities and types of products in advance. Implementing the following recommendations will have a positive impact:
- Calculation of the total tax burden and comparison with similar data related to a particular activity.
- Calculation of burdens associated with income tax. For enterprises production sector low rate – 3% or less. Trade organizations are considered unprofitable at less than 1%.
- The next step should be the value of the share of deductions in the amount of tax, which is calculated from the tax base. This figure should not exceed 98%.
Specific data on areas of activity
There is no single indicator; in each industry it is calculated separately for each year. Profitability in the mining industry is considered normal at 50%. For the woodworking sector it does not even reach 1%. For services, a level of 12-20% is considered acceptable.
Conducting cost-benefit analysis
The profitable parameter is also called the profitable rate. Because the indicator reflects how much profit there was after the sale of services and goods with work.
If parameters in this direction fall, it means that the demand for products and the level of their competitiveness decreases. Then we need to think about additional measures to stimulate demand. There is a need to develop new market niches, or to increase quality characteristics products.
When factor analysis is carried out on profitability of sales, the influence of figures on how prices change in goods and services with work and how it affects the cost level deserves special consideration.
Identification of the reporting period and reference time is required to identify trends in changes in profitability in sales. The base period allows you to use for:
- last year
- time when the company makes the greatest profit
The base period is needed in order to compare the indicators with what was taken as a basis during the calculations.
Reducing costs or increasing prices for the range offered helps increase profitability. An organization must focus on several parameters at once in order to make the right decision. We are talking about competitive activity and its assessment, the possibility of saving internal resources, fluctuations in consumer demand. The dynamics of market conditions are also studied separately.
It is planned to use tools that have become an integral part of the policy on goods and prices, sales, and communications.
Profits are also being increased in several directions at once:
- Motivation for staff. A separate sector in management activities becomes proper organization personnel labor. Sales of the final product, reduction of defects in products, production of products with more high quality. Incentive and motivational strategies will improve the quality of work performed by employees. For example, holding events and so on.
- Cost reduction. To do this, you need to identify suppliers whose prices are much lower than those of competitors. Despite the savings on materials, it is necessary to ensure that the final quality of the product does not decrease.
- Creation of a new marketing policy. Product promotion should be based on research of market conditions and consumer preferences. Large companies create entire departments that deal specifically with marketing. Or they hire a separate specialist responsible for carrying out marketing activities. This policy is not complete without financial investments, but the results are fully justified.
- Determination of acceptable quality. Demand is increasing only for quality items. An enterprise should take all measures to increase it if profitability indicators noticeably decrease.
Let's consider the return on sales ratio(ROS). This indicator reflects the efficiency of the enterprise and shows the share (in percent) of net profit in total revenue enterprises. IN Western sources The return on sales ratio is called ROS ( return on sales). Below I will consider the formula for calculating this coefficient, give an example of its calculation for a domestic enterprise, describe the standard and its economic meaning.
Sales profitability. Economic meaning of the indicator
It is advisable to start studying any coefficient with its economic sense. Why is this coefficient needed? It reflects the business activity of an enterprise and determines how efficiently the enterprise operates. The return on sales ratio shows how much Money from the products sold is the profit of the enterprise. What matters is not how many products the company sold, but how much net profit it earned clean money from these sales.
The return on sales ratio describes the efficiency of sales of the company's main products, and also allows you to determine the share of cost in sales.
Return on sales ratio. Calculation formula
Sales return formula Russian system The financial statements look like this:
Return on sales ratio = Net profit/Revenue = line 2400/line 2110
It should be clarified that when calculating the coefficient, instead of net profit in the numerator, the following can be used: gross profit, earnings before interest and taxes (EBIT), earnings before taxes (EBI). Accordingly, the following coefficients will appear:
Gross profit margin ratio = Gross profit/Revenue
Operating profitability ratio =EBIT/Revenue
Return on sales ratio for profit before taxes =EBI/Revenue
To avoid confusion, I recommend using a formula where the numerator is net profit (NI, Net Income), because EBIT is calculated incorrectly based on domestic reporting. The following formula for Russian reporting is obtained:
In foreign sources, the return on sales ratio - ROS is calculated using the following formula:
Video lesson: “Sales profitability: calculation formula, example and analysis”
Sales profitability. An example of a balance sheet calculation for Aeroflot OJSC
Let's calculate the return on sales for Russian company JSC Aeroflot. To do this, I will use the InvestFunds service, which allows you to receive financial statements enterprises by quarter. Below is the import of data from the service.
Profit and loss statement of JSC Aeroflot. Calculation of the return on sales ratio
So, let's calculate the return on sales for four periods.
Sales return ratio 2013-4 =11096946/206277137= 0.05 (5%)
Return on sales ratio 2014-1 = 3029468/46103337 = 0.06 (6%)
Return on sales ratio 2014-2 = 3390710/105675771 = 0.03 (3%)
As you can see, the return on sales increased slightly to 6% in the first quarter of 2014, and in the second it halved to 3%. However, the profitability is greater than zero.
Let's calculate this coefficient according to IFRS. To do this, let’s take financial reporting data from the company’s official website.
IFRS report of JSC Aeroflot. Calculation of the return on sales ratio
For nine months of 2014, the return on sales ratio of Aeroflot OJSC was equal to: ROS = 3563/236698 = 0.01 (1%).
Let's calculate ROS for 9 months of 2013.
ROS=17237/222353 =0.07 (7%)
As you can see, over the year the ratio worsened by 6% from 7% in 2013 to 1% in 2014.
Return on sales ratio. Standard
Meaning normative value for a given coefficient Kp>0. If the profitability of sales turns out to be less than zero, then you should seriously think about the efficiency of enterprise management.
What level of return on sales ratio is acceptable for Russia?
– mining – 26%
— Agriculture – 11%
– construction – 7%
- wholesale and retail – 8%
If you have a low coefficient value, then you should increase the efficiency of enterprise management by increasing the customer base, increasing the turnover of goods, and reducing the cost of goods/services from subcontractors.
Return on sales can say what the organization’s activities in selling its products are: profitable or unprofitable.
The concept of return on sales (RP or ROM)
- RP– an indicator reflecting the ability of the organization’s managers to control all kinds of costs. This indicator is expressed as a percentage of income and revenue.
- RP coefficient– shows what part of the profit falls on one earned conventional unit.
Let's pretend that financial efficiency enterprises are almost the same. Enterprises with the shortest production cycle will have a lower return on sales than enterprises with a long-term cycle.
- If the RP is less than zero, then we can conclude that the enterprise is operating at a loss, since in this case the cost exceeds the revenue.
- Zero profitability is a sign that the organization spends exactly the same amount on production as it acquires after sale.
- A positive return on sales means that the project is profitable. The higher the indicator, the better for the enterprise.
It is clear that the profitability indicator is very dependent on the field of activity of the enterprise. For example, in banking this figure can reach 100%, and in heavy industry – even 3%.
Increased profitability of sales
An increase in RP is undoubtedly a positive factor for any company.
You can talk about increasing profitability if:
- The analysis revealed that the growth rate of income is greater than the growth rate of costs.
This could be affected by the following:
- Sales volume has increased.
- The range of products produced has changed.
With an increase in demand for goods from buyers, an increase in the number of products sold is later observed. Consequently, due to the work of the production lever, income grows faster than costs. The company's management is able to achieve revenue growth by raising prices for a certain product or completely reducing its range.
- The analysis revealed that the rate of decline in income is much less than the rate of decline in costs.
This can usually lead to:
- raising prices for manufactured products;
- making changes to the structure of the sales range.
These events are considered not entirely positive for the enterprise, and management must be aware of this. After all, profitability indicators look better, but the amount of income decreases.
Revenue growth and cost reduction. This is achieved if:
- changes were made in the sales range;
- cost levels were changed;
- prices increased.
This situation is undoubtedly positive for the organization.
Its reduction
We can talk about reducing RP in the following cases.
Cost growth rate is greater than revenue growth rate
This may be due to the following reasons:
- price reduction;
- changes in the direction of increasing cost levels;
- changes in the structure of the product range.
This situation is not a positive trend. To improve the situation, it is important to think about the organization's pricing as well as how costs are controlled.
The rate of revenue decline is faster than the rate of cost reduction
This situation usually occurs for only one reason:
- Decrease in sales volumes. It is quite normal if an organization, for one reason or another, decides to reduce its production in a certain market. Costs fall much more slowly than revenues due to production leverage.
Increased costs and decreased revenue
Reasons that could influence this fact:
- prices were reduced;
- it was decided to make changes to the structure of the product range;
- cost standards have been increased.
In this situation, it is also advisable to analyze the formation of prices at the enterprise and pay attention to cost control.
Note: If the market is stable, then income, as a rule, changes faster than costs only under the influence of the production lever.
Formula
In fact, RP is easy to calculate using numbers that you already know. To do this, you will need to select the appropriate formula from the three listed below and substitute your values. If you do not have specific numbers, you can always find them in the balance sheet.
Calculation of the formula for return on sales
In general, the RP formula looks like this:
RP = profit (loss) from sales / sales revenue * 100%
However, it is also common to calculate gross, operating and net RP. All calculation methods will differ in the numerator, but the denominator always remains the same.
Formula 1: calculation of gross RP
RP = gross profit: sales revenue * 100%
This indicator reflects the share of profit in each monetary unit earned by the enterprise.
Formula 2: calculation of operating profitability (return on sales based on EBIT)
RP = profit (loss) from taxation: sales revenue * 100%
The indicator reflects the share of profit from sales before taxes and interest in each monetary unit earned by the enterprise.
Balance formula
According to the new balance sheet form, the above formulas for return on sales will look like this:
General formula:
RP = p.2200: p.2110 * 100%,
Formula 1:
RP = p.2100: p.2110 * 100%,
Formula 2:
RP = p.2300: p.2110 * 100%,
Formula 3:
RP = p.2400: p.2110 * 100%.
According to the old balance sheet form, these same formulas look different:
General formula:
RP = p.050: p.010 * 100%,
Formula 1:
RP = p.029: p.010 * 100%,
Formula 2:
RP = p.140: p.010 * 100%,
Formula 3:
RP = p.190: p.010 * 100%,
where: RP – return on sales;
Important! The current (new) reporting form was approved by Order of the Ministry of Finance of the Russian Federation dated July 2, 2010 No. 66n.
Note: From 01/01/2013, the profit and loss statement is called the financial performance statement.
RP coefficient and its formula
As mentioned above, the profitability ratio reflects the share of the organization’s profit attributable to each conventional unit of earnings. This, in general, is profitability. The coefficient is calculated using the formulas already presented, but not in percentage terms.
How should you calculate the return on sales ratio:
K RP = profit (loss) from sales / sales revenue
The mentioned coefficient can also be calculated using the balance. It can also be calculated not only in general, but also for each individual product or service. This makes sense if you need to analyze economic activity any enterprise.
How to interpret the calculated values
For example, the calculated profitability of RP is 25%. This means that for every 100 monetary units The enterprise accounts for 25 units of profit. You can also explain the answer as follows: for every ruble there are 25 kopecks of profit.
Note: By calculating the profitability ratio, we get facts. But having received a specific value, we will never be able to say: this or that investment of capital is profitable or not. For these purposes, for example, asset indicators are calculated.
Calculation example
Sales revenue of the enterprise JSC Ivolga for 2013 amounted to 10 million rubles, and in 2014 it increased to 12 million. Operating profit (before tax) in 2013 was 3 million rubles, and in 2014 it increased to 3 .8 million. How has the operating RP changed?
Solution:
Let's calculate the operating profitability of sales in 2013:
RP 2013 = 3 million/10 million * 100% = 30%.
Let's calculate the same figure for 2014:
RP 2014 = 3.8 million/12 million * 100% = 31.7%.
Let's calculate the change in profitability of sales:
∆ RP = 31.7% – 30% = 1.7%.
Conclusion: In 2014, sales profitability before tax increased by 1.7%, which is undoubtedly a positive trend for the Ivolga OJSC enterprise.
Comment: The return on sales ratio is calculated based on the indicators of the reporting year. Accordingly, it cannot reflect the planned effect of long-term capital investments.
There is nothing more important for a company's management than maximizing revenue. In this regard, it is recommended to periodically carry out calculations and analyze the profitability of sales, and then compare the indicators with previous periods, identify significant factors and draw meaningful conclusions for the future.