Relative profitability indicators characterize the economic efficiency of using a particular resource. The main value involved in the calculations of each of them is the amount of net profit. For example, to determine the return on equity, you need to calculate the ratio of its value to the amount of equity, applied or borrowed capital.
It is necessary
the balance of the company
Instructions
Step 1
The capital of the company consists of the funds invested by the founders and third-party investments. For owners and investors, receiving dividends is of the greatest interest. Thus, two concepts can be divided: the profit of the firm itself, i.e. income from the sale of products, and the profit of capital participants.
Step 2
To calculate how effective investments can be, you need to determine the return on equity. There are several similar indicators, in the international notation system they are represented as ROE, ROСE and ROIC according to the initial letters of English words. Despite some differences, the calculation of each of them is based on the amount of net profit.
Step 3
Equity capital is a set of monetary funds and tangible assets intended for the implementation of the main economic activities of the enterprise. When they talk about the market value of the entire company, they mean exactly this value. To determine the return on equity, i.e. ROE indicator (Return on equity), use the formula: ROE = NP / IC * 100%, where NP is net profit, IC is the average annual value of equity.
Step 4
The positive dynamics of equity capital characterizes the company's ability to maintain financial equilibrium only with internal funds. And besides, it is effective to invest part of the net profit remaining after covering all types of costs that make up the cost of goods sold. Otherwise, you should seek the help of third-party investors.
Step 5
The ROIС (Return on invested capital) indicator is calculated according to a similar scheme, but the denominator contains a value that exceeds equity capital by the amount of external investments. Keep in mind that only investments directly in the main activity are counted, i.e. in the production of a product or service. This also applies to net profit, which is considered only from the sale of these products: ROIС = PP / IC * 100%, where IC is the average annual total value of equity and borrowed capital.
Step 6
If you need to assess the attractiveness of a particular project for potential investors, use the indicator of applied capital ROСE (Return on capital employed): ROСE = (PP - CI) / IC * 100%, where CI - dividends to investors based on the results of the financial period., that in the absence of borrowed capital, the ROСE indicator is equal to the ROE.
