"Meet former classmates, one was an excellent student at school, the other was a loser.
Excellent student - thin, ragged. Loser - in a suit from Versace, on the 600th Merce.
Excellent student:
— Listen, Vasya, they say you became a businessman? But how do you count money, you had only deuces in mathematics at school!
- Yes, everything is simple: I buy for $ 2, I sell for 4; I live on these 2 percent”.
An anecdote from the distant nineties demonstrates how different ideas about profitability can be. As, in fact, many different indicators measure this profitability.
One of them is the rate of return. equity ROE. The formula for calculating this financial indicator, its application and economic meaning are in the article below.
Types of profitability
The goal of each investor is to invest money as efficiently as possible, that is, to get the maximum return on a minimum investment. The profitability of an enterprise can be compared with its economic efficiency, since it shows how much value added the company is able to generate over a period of time (usually a year), which, in turn, reflects the overall rationality of the company using its resources to make a profit.
In the economy, there are absolute indicators (revenue, net profit and so on - they can be found in the reporting of companies) and relative indicators, which are calculated by comparing absolute ones. Profitability is just a relative indicator.
Profitability compares to general view various absolute indicators with the company's net profit in percentage form, as if showing what proportion of the absolute indicator is net profit, thereby characterizing, among other things, its payback.
The following types of profitability are most often distinguished:
- Return on assets - characterizes how efficiently the company's assets are able to generate profit, shows the share of net profit in the company's assets.
- Return on equity - characterizes how effectively equity (not burdened with obligations) is able to generate net profit, shows the share of net profit in equity.
- Profitability of sales - characterizes the efficiency of sales, shows the share of net profit in the company's revenue.
Profitability multipliers
To compare companies with others and calculate values various kinds profitability, there is a group of special multipliers. The main ones are:
- ROA (Return On Assets - return on assets);
- ROE (Return On Equity - return on equity);
- ROS (Return On Sales - return on sales).
As an example of calculating profitability, we calculate the indicated multipliers for the Rosneft company. To complete the task, let's take the company's financial statements in accordance with IFRS for 2016 (for calculating multipliers, as a rule, annual financial statements are taken). From this statement, to obtain initial data, we need a balance sheet and a profit / loss statement.
Fig 1. Balance sheet of the company "Rosneft"
To calculate ROA, we need total cost assets, which we can take from the balance sheet, the line "Total assets" - 11,030 billion rubles. From the income statement, you should take the value of net profit in the corresponding line - 201 billion rubles.
The formula for calculating the return on assets is the ratio of net profit of 201 billion rubles to the company's assets of 11,030 billion rubles, multiplied by 100, that is, equal to 1.8%. Traditionally ROA is the smallest value of the described multipliers.
Rice. 2. Profit and loss statement of Rosneft
To calculate ROE, we need the company's equity, which is indicated in the balance sheet line - 3,726 billion rubles. But it can also be calculated as the difference between assets of 11,030 billion rubles. and the amount of short-term liabilities (to be paid in the next 12 months) 2,773 billion rubles. and long-term liabilities (which must be paid within more than 12 months) 4,531 billion rubles, that is, a total of 7,304 billion rubles.
It turns out that the value of equity is 3,726 billion rubles. The next step is to share the net profit of 201 billion rubles. for equity capital of 3,726 billion rubles. and multiply by 100, that is, get an ROE of 5.39%. This is somewhat more than ROA, since, as a rule, a company, in addition to equity, also attracts borrowed capital.
To calculate the profitability of sales, you should take the value of net profit from the profit and loss statement of 201 billion rubles. and the value of revenue from a similar report is 4,887 billion rubles. Next, you should divide the value of net profit of 201 billion rubles. for the value of revenue of 4,887 billion rubles. and multiply by 100 to convert to percentage form. It turns out that ROS is 4.11%.
Conclusion
Due to the volatility of net revenue, it is advisable to calculate the profitability of a business for several periods, while comparing it with similar indicators of other companies in the industry. Profitability shows the general expediency of investments for investors - if it is lower than the profitability of risk-free instruments, then investors may prefer them.
Profitability does not reflect the market value of shares. If a company shows good profitability, its shares are often highly overvalued by the market. Therefore, it is better to buy securities of such companies on corrections. And compare the readings of profitability multipliers with the data of income multipliers - P/E, P/B, P/S.
Source: "opentrainer.ru"
Return on equity
When analyzing financial statements to assess the profitability and profitability of an enterprise, the return on equity ratio is used.
Definition: The return on equity ratio is calculated as the ratio of net profit to the average annual amount of equity.Designation in formulas (acronym): ROE
Synonyms: cost (price) share capital, return on equity, Return on Equity, Return on shareholders’ equity
The formula for calculating the return on equity indicator:
where ROE is return on equity (Return on Equity), %
NI — net income (Net Income), rub
EC — Equity Capital, RUB
Appointment. The return on capital ratio characterizes the efficiency of capital use and shows how much the company has net profit per ruble advanced into capital.
Note. When analyzing, it is desirable to keep in mind that net profit reflects the results of operations and the prevailing level of prices for goods and services, mainly for the past period.
Equity is built up over a number of years. It is expressed in an accounting estimate, which can be very different from the current one. market value companies.
For more detailed analysis you can use the technique of 4-factor analysis of return on equity.
Net profit is included in the gross (balance sheet) profit, and after spending 3 factor analysis gross profit, one can judge the changes in the net profit itself.
Example. Determine the ratio of the return on equity of the enterprise compared to the industry average.
The company's net profit amounted to 211.4 million rubles.
The volume of the advanced capital is 1709 million rubles.
The industry average value of the return on equity ratio is 24.12%.
Calculate the value of the return on equity ratio for the enterprise:
ROEpr \u003d 211.4 / 1709 \u003d 0.1237 or 12.37%.
Let's define the ratio of return on capital:
ROEpr / ROEav = 12.37 / 24.12 = 0.5184 or 51.84%.
The return on equity of the enterprise is 51.84% of the industry average value of the coefficient.
Source: "investment-analysis.ru"
Determine the return on equity
Return on equity - important indicator financial analysis. Return on equity, like other indicators of profitability, indicates the effectiveness of the business. More precisely, about how the owners' money invested in the company's capital works.
To put it simply, profitability helps to understand how many kopecks of profit each ruble of its own capital brings to the company. The return on equity is able to give an idea to the investor or its specialists how successfully the company manages to keep the return on capital at the proper level and thereby determine the degree of its attractiveness for investors.
The system of indicators has a similar indicator - return on assets. However, in contrast to it, the return on equity makes it possible to judge precisely the work of the net equity of the enterprise. At the same time, the attracted funds spent on the acquisition of property can also interfere with the return on assets.
How to Find the Return on Equity Ratio
Profitability is always the ratio of profit to the object whose return must be evaluated. In this case, we consider equity. So, we will share the profit on it.
AT financial analysis return on equity is usually denoted using the ROE coefficient (short for the English return on equity). We use this notation, and then the formula for calculating the indicator may look like this:
ROE = Pr / SK × 100,
Pr - net profit (the indicator of return on equity is considered only for net profit).
SK - equity (SK). To make the calculation more informative, an average SC is taken. The easiest way to calculate it is to add the data for the beginning and end of the period and divide the result by 2.
Return on equity is a ratio that is relative in nature, it is usually expressed as a percentage.
Factor analysis of return on equity
Sometimes another formula is used for calculation - the so-called Dupont formula. She has next view:
ROE \u003d (Rev / Ext) × (Ext / Act) × (Act / SK),
where: ROE - desired profitability;
Pr - net profit;
Vyr - revenue;
Act - assets;
SC - equity.
Return on equity - balance sheet formula
This indicator can be found not only by calculation, but from reporting documents. So, there is a simple answer to the question of how to find equity on the balance sheet. To determine the return on equity, the information contained in the lines of the balance sheet (form 1) and in the income statement (form 2) is used. The balance sheet will look like this:
ROE = line 2400 form 2 / line 1300 form 1 × 100.
Profitability or return on equity - normative value
The main criterion used in assessing the return on equity is the comparison of this indicator with the return on investment in other lines of business, for example, in the securities of other companies.
To assess the effectiveness of investments, the standard value of ROE is widely used. Typically, investors are guided by values from 10 to 12%, which are typical for business in developed countries. If inflation in the state is high, then the return on capital increases accordingly. For Russian economy 20% is considered normal.
If the indicator goes into the "minus" - this is already an alarming signal and an incentive in order to increase the return on equity. But a significant excess over normative value is also an unfavorable situation, as investment risks increase.Profitability or return on equity is important to assess the performance of the enterprise. To find this indicator, several formulas are used, the data for which are taken from the lines of the balance sheet and the income statement.
Source: "nalog-nalog.ru"
ROE - indicator calculation formula
Return on equity (Return on Equity, Return on Shareholders' Equity, ROE) shows the efficiency of using own invested funds and is calculated as a percentage. Calculated according to the formula:
ROE = Net Income / Average Shareholder's Equity
ROE = Net Income / Average Net Assets
where Net Income is net income before common stock dividends, but after preferred stock dividends, since equity does not include preferred shares.
ROE can also be represented in the following form:
ROE = ROA * Coefficient financial leverage
It is clear from the relation that correct use borrowed funds allows you to increase the income of shareholders due to the effect of financial leverage. This effect is achieved due to the fact that the profit received from the company's activities is much higher than the loan rate. By the value of financial leverage, one can determine how the funds raised are used - for the development of production or for patching holes in the budget.
It is obvious that at good management company, the value of this indicator must be greater than one.
On the other hand, too high value financial leverage is also bad, as it can be associated with high risk, since it indicates a high share of borrowed funds in the asset structure. The higher this proportion, the more likely it is that the company will be left without net profit at all if it suddenly encounters any even minor difficulties.
A special approach to calculating the indicator is the use of the Dupont formula, which breaks the ROE into components that allow you to better understand the result:
ROE (Dupon formula) = (Net income / Revenue) * (Revenue / Assets) * (Assets / Equity)
ROE (Dupon formula) = Net profit margin * Asset turnover * Financial leverage
AT Russian system accounting the formula for the return on equity ratio takes the form:
ROE = Net Income / Average Annual Cost of Equity * 100%
ROE = line 2400 / ((line 1300 + line 1530) at the beginning of the period + (line 1300 + line 1530) at the end of the period) / 2 * 100%
ROE = Net Income * (365/Number of Days in Period) / Average Annual Cost of Equity * 100%
According to many economists-analysts, when calculating the coefficient, it is advisable to use the net profit indicator. This is due to the fact that the return on equity characterizes the level of profit that owners receive per unit of invested capital.
The indicator characterizes the efficiency of using own sources financing of the enterprise and shows how much net profit the company earns from 1 ruble of its own funds.ROE allows you to determine the effectiveness of the use of capital invested by the owners, and compare this indicator with the possible income from investing these funds in other activities. In world practice, the ROE indicator is used as one of the main indicators of the competitiveness of banks.
Source: "afdanalyse.ru"
Return on equity
Return on equity (ROE) is an indicator of net income compared to the equity of an organization. This is the most important financial indicator of return for any investor, business owner, showing how efficiently the capital invested in the business was used.
Calculation (formula)
Return on equity is calculated by dividing net income (usually for the year) by the equity of the organization:
Return on Equity = Net Income / Equity
To get the result as a percentage, this ratio is often multiplied by 100.
A more accurate calculation involves using the arithmetic average of equity for the period for which net profit is taken (usually for a year) - equity at the beginning of the period is added to equity at the end of the period and divided by 2. The organization's net profit is taken according to the data "Profit and Loss Statement", equity - according to the liabilities of the Balance.
Return on Equity = Net Profit*(365/Number of days in the period)/((Equity at the beginning of the period + Equity at the end of the period)/2)
A special approach to calculating the return on equity is the use of the Dupont formula.
Dupont's formula breaks the indicator into three components, or factors, allowing you to better understand the result:
Return on equity (Dupon formula) = (Net income / Revenue) * (Revenue / Assets) * (Assets / Equity) = Net profit margin * Asset turnover * Financial leverage.
Normal value
According to average statistics, the return on equity is approximately 10-12% (in the US and the UK). For inflationary economies, such as Russia, the figure should be higher. chief comparative criterion when analyzing the return on equity, the percentage of alternative return that the owner could receive by investing his money in another business is used.
Source: "audit-it.ru"
Return on equity ROE
Return on equity (ROE, return on equity) is a financial indicator expressing return on equity. Close to ROI. The indicator shows the ratio of net profit for the period to the equity capital of the enterprise:
ROE = PE / SK
where PE is net profit;
SC - equity.
Net income excludes dividends on ordinary shares, and equity excludes preference shares.
Advantages
The ROE coefficient is one of the most important indicators for investors, top managers, owners of the enterprise, as it shows the effectiveness of their own investments (excluding borrowed funds).
disadvantages
Analysts question the reliability of ROE, believing that the return on equity ratio overestimates the company's value. There are 5 factors that make ROE incompletely reliable:
- High project duration – the longer the analysis period, the higher the ROE.
- A small share of total investment on the balance sheet. The smaller the share, the higher the ROE.
- Irregular depreciation. The more uneven the depreciation in the reporting period, the higher the ROE.
- Slow return on investment. The slower the project pays off, the higher the ROE.
- Growth rates and investment rates. How younger company, how faster growth balance, the lower the ROE.
The calculation of the ROE ratio is complicated by the fact that if we are analyzing a company with a high share of attracted capital in the balance sheet, then the calculation of ROE will not be transparent. With a negative net asset value, the calculation of ROE and its subsequent analysis is ineffective.
Standard value
The ROE norm for developed countries is 10-12%. For developing countries with high rate inflation is many times higher. On average, 20%. Roughly speaking, the return on equity is the rate at which the company attracts investments.
An analysis of the return on equity ratio by divisions of the company (by business lines) can clearly show the effectiveness of investing in a particular line of business, for the production of a particular product or service. Also, for an investor, a comparison of ROE for two companies in which he has an interest can show the most effective in terms of return.
When evaluating the standard value of ROE, it is worth considering the cost of replacement. If on this moment low-risk securities are available, yielding 16% per annum, and the main line of business gives a ROE of 9%, then the goal for ROE should be set higher, or the business as a whole should be reviewed.
Source: "finance-m.info"
ROE Calculation Options
Return On Equity (ROE) ratio is the ratio of a company's net profit to the average annual share capital.
Return on equity characterizes the profitability of a business for its owners, calculated after deducting the interest on the loan (i.e., net income, unlike indicators such as ROA or ROIC, is not adjusted for the amount of interest on the loan).
Calculation formula:
There are some other options for calculating this coefficient. In particular, not net profit, but profit before tax can be used in the calculation. In addition, sometimes instead of ROE, the return on common equity (ROCE) indicator is used, in which case the indicator formula is as follows:
In all cases, the calculation of this ratio assumes the use of data from annual income statements. If the calculation uses quarterly or other reporting, then the coefficient must be multiplied by the number of reporting periods in a year.
Source: "cfin.ru"
Return on equity ratios
Return on equity (ROE, i.e. return on equity,) is an indicator of net profit in comparison with the equity of an organization. This is the most important financial indicator of return for any investor, business owner, showing how efficiently the capital invested in the business was used.
Unlike the similar indicator “return on assets”, this indicator characterizes the efficiency of using not the entire capital (or assets) of the organization, but only that part of it that belongs to the owners of the enterprise.
Return on equity is one of the most important business performance indicators. Any investor, before investing his finances in an enterprise, analyzes this parameter. It shows how competently the assets belonging to the owners and investors are used.
The return on equity ratio reflects the value of the ratio of net profit to the company's own funds. It is clear that such a calculation makes sense when the organization has positive assets that are not burdened with borrowing restrictions.
According to average statistics, the return on equity in the US and the UK is approximately 10-12%. For inflationary economies, such as Russia, the figure should be higher. The main comparative criterion in the analysis of return on equity is the percentage of alternative returns that the owner could receive by investing his money in another business.
For example, if a bank deposit can bring 10% per annum, and a business brings only 5%, then the question may arise about the advisability of further conducting such a business.
According to the international rating agency S&P, the return on capital ratio of Russian enterprises was 12% in 2010, the forecast for 2011 was 15%, for 2012 - 17%. Domestic economists believe that 20% is a normal value for the return on equity.The higher the return on equity, the better. However, as can be seen from the Dupont formula, a high value of the indicator may result from too high financial leverage, i.e. big share borrowed capital and a small share of equity, which negatively affects financial stability organizations. This reflects the main law of business - more profit, more risk.
The calculation of the return on equity ratio only makes sense if the organization has equity (i.e., positive net assets). Otherwise, the calculation gives negative meaning, unsuitable for analysis.
The following indicators affect the return on equity:
- efficiency of operating activity (net profit from sales);
- return of all assets of the organization;
- the ratio of own and borrowed funds.
How to evaluate the return of a business using the profitability ratio
To do this, it is worth comparing it with indicators of alternative returns. How much will a businessman get if he invests his money in another business? For example, he will attribute the funds to a bank deposit, which will bring 10% per annum. And the profitability ratio of the existing enterprise is only 5%. It is clear that it is inexpedient to develop such a company.
Compare the indicator with the norms that have historically developed in the region. Thus, the average profitability of companies in England and the US is 10-12%. In countries with stable economies, a coefficient in the range of 12-15% is desirable. For Russia - 20%. In each particular state, the values of the indicator are influenced by many factors (inflation, industrial development, macroeconomic risks, etc.).
High profitability does not always mean a high financial result. The higher the ratio, the better. But only when a large share investments are the company's own funds. If borrowed funds predominate, the organization's solvency is at risk.
Thus, a huge debt load is dangerous for the financial stability of the firm. Calculating the return on equity is useful if the company has this very capital. The predominance of borrowed funds in the calculation gives a negative indicator, which is practically not suitable for analyzing the return on business. Although it is impossible to be categorical about the profitability ratio. Its use in analysis has some limitations.
The real income of the owner or investor does not depend on assets, but on operational efficiency (sales).
Based on a single indicator of return on own capital investments, it is difficult to assess the productivity of a firm. Most companies are heavily leveraged. The same banks exist only on borrowed funds (attracted deposits). And their net assets serve only as a guarantor of financial stability. Whatever it was, but the profitability ratio illustrates the company's income earned for investors and owners.
Return on Equity Formula
The company's return on equity shows the amount of profit that the company will receive per unit cost of equity. For a potential investor, the value of this indicator determines:
- The profitability ratio gives an idea of how wisely the invested capital was used.
- Owners invest their money to form authorized capital enterprises. In return, they are entitled to a percentage of the profits.
- The return on equity reflects the amount of profit that the investor will receive from each ruble advanced to the company.
You can calculate the profitability ratio different ways. The choice of formula depends on the calculation tasks. The calculation of the formula for return on equity on the balance sheet is the ratio of net profit for the year to the company's own funds for the same period. The data is taken from the Profit and Loss Statement and the Balance Sheet. If you need to find the coefficient in percent, then the result is multiplied by 100.
Net return on equity formula:
RSK \u003d PE / SK (avg.) * 100,
where RSK is the return on equity,
NP - net profit for billing period,
SC (avg.) - the average amount of investments for the same billing period.
Formula calculation example. Firm "A" has own funds in the amount of 100 million rubles. Net profit for the reporting year amounted to 400 million. RSK \u003d 100 million / 400 million * 100 \u003d 25%.
An investor can compare several companies in order to decide where it is more profitable to invest money.
Example. Firm "A" and "B" have the same amount of equity, 100 million rubles. Enterprise A's net profit is 400 million and Enterprise B's net profit is 650 million. Substitute the data into the formula. We get that the profitability ratio of the company "A" - 25%, "B" - 15%.
The profitability of the first organization turned out to be higher at the expense of its own funds, and not at the expense of revenue (net profit). After all, both enterprises entered the business with the same amount of capital investment. But firm "B" worked better.
The formula for the financial return on equity
To obtain more accurate data, it makes sense to divide the analyzed period into two: calculate income at the beginning and at the end of a certain period of time.
The calculation is:
RSK \u003d PE * 365 (days in the year of interest) / ((SKng + SKkg) / 2),
where SKng - equity at the beginning of the year;
SKkg - the amount of own funds at the end of the reporting year.
If the indicator needs to be expressed as a percentage, then the result, respectively, is multiplied by 100.
What numbers are taken from accounting forms
To calculate net profit (from form No. 2, “Profit and Loss Statement”; line numbers and their names are indicated):
- 2110 "Revenue";
- 2320 Interest receivable;
- 2310 "Income from participation in other organizations";
- 2340 "Other income".
To calculate the amount of equity capital (from form N1, "Balance sheet"):
- 1300 “Total for the section “Capital and reserves”” (data at the beginning of the period plus data at the end of the period);
- 1530 "Deferred income" (data at the beginning plus data at the end of the reporting period).
The formula for calculating the standard rate of return
How to understand that it makes sense to invest in a business? Return on equity shows the normative value. One way is to compare profitability with other options for advance money (investing in shares of other firms, buying bonds, etc.). The normative level of profitability is considered to be interest on deposits in banks. This is a certain minimum, a certain boundary for determining the return of a business.
The formula for calculating the minimum profitability ratio:
RSK (n) \u003d Std * (1 - Stnp),
where RSK (n) is the standard level of return on equity (relative value);
Std - deposit rate (average for the reporting year);
Stnp - income tax rate (for the reporting period).
If, as a result of calculations, the rate of return on invested own financial resources turned out to be less than RSK (n) or received a negative value, then it is unprofitable for investors to invest in this company. The final decision is made after analyzing the profitability for several recent years.
Dupont formula for calculating return on equity
To calculate the return on equity ratio, the Dupont formula is often used. It breaks the coefficient into three parts, the analysis of which allows you to better understand what affects the final coefficient to a greater extent. In other words, this is a three-way analysis of the ROE. DuPont's formula is:
Return on equity ratio (Dupon formula) = (Net income/Revenue) * (Revenue/Assets)* (Assets/Equity)
The Dupont formula was first used in financial analysis in the 20s of the last century. It was developed by the American chemical corporation DuPont. Return on equity (ROE) according to the Dupont formula is divided into 3 components:
- operational efficiency (profitability of sales),
- efficiency of asset use (asset turnover),
- leverage (financial leverage).
ROE (according to the Dupont formula) = Return on Sales * Asset Turnover * Leverage
In fact, if you reduce everything, you get the formula described above, but such a three-factor selection of components allows you to better determine the relationship between them.
Return on equity ratio
The return on equity ratio is one of the most important ratios used by investors and business owners, which shows how effectively the money invested (invested) in the enterprise was used.
The difference between return on equity (ROE) and return on assets (ROA) is that ROE does not show the effectiveness of all assets (like ROA), but only those that belong to the owners of the enterprise.
This indicator is used by investors and owners of the enterprise to evaluate their own investments in it. The higher the value of the coefficient, the more profitable the investment. If the return on equity less than zero, that is, a reason to think about the feasibility and effectiveness of investments in the enterprise in the future
As a rule, the value of the coefficient is compared with alternative investments in shares of other enterprises, bonds and, in extreme cases, in a bank. It is important to note that too great importance indicator can negatively affect the financial stability of the enterprise. Do not forget the main law of investment and business: more profitability - more risk.
Profitability is a fairly broad concept that can be applied to different components of any company. She can choose such synonyms as efficiency, payback or profitability. It can be applied to assets, capital, production, sales, etc. When calculating any of the performance indicators, the same questions are answered: "are resources used correctly" and "is there a benefit?" The same is indicated by the return on equity (the formula used to calculate it is presented below).
Equity and investors
Equity refers to the financial resources of the owner of the company, shareholders and investors. The last group is represented by people or companies that invest in business development, in third-party firms. It is important for them to know that their investments are profitable. Further cooperation and development of the company in the market depends on this.
Every company needs financial injections - both internal and external. And the situation is much more favorable when these funds are represented not by bank loans, but by investments from sponsors or owners.
How to understand whether it is worth continuing to invest in a particular company? Very simple. You just need to calculate your own capital. The formula is easy to use and transparent. It can be used for any organization based on balance sheet data.
Calculation of the indicator
What does the formula look like? Return on equity is calculated by the following calculation:
Rsk \u003d PE / SK, where:
Rsk - return on capital.
SC is the equity capital of the firm.
PE is the net profit of the enterprise.
The payback of own funds is calculated most often for a year. And all the necessary values are taken for the same period. The result obtained gives a complete picture of the activities of the enterprise and the profitability of equity capital.
Do not forget that any company can be invested not only but also borrowed. In this case, the return on equity, the calculation formula of which is given above, gives an objective estimate of the profit from each unit Money invested by investors.
If necessary, the profitability formula can be changed to obtain a result in percent. In this case, it is enough to multiply the resulting quotient by 100.
If you need to calculate the indicator for a different period (for example, less than a year), then you need a different formula. The return on equity in such cases is calculated as follows:
Rsk \u003d PE * (365 / Period in days) / ((SKnp + SKkp) / 2), where
SKnp and SKkp - equity at the beginning and end of the period, respectively.
Everything is relative
In order for investors or owners to fully appreciate the profitability of their investments, it is necessary to compare it with a similar indicator that could be obtained by financing another company. If the efficiency of the proposed investment is higher than the real one, then it may be worth switching to other companies that require investment.
The formula developed to calculate the standard value can also be used. The return on equity in this case is calculated using the average rate on bank deposits for the period (Ad) and on income tax (CIT):
Krnk \u003d Sd * (1-Snp).
When comparing the two indicators, it will immediately become clear how well the company is doing. But for the full picture, it is necessary to conduct an analysis of the effectiveness of equity over several years, so that it is possible to more accurately determine the temporary or permanent decline in profitability.
It is also necessary to take into account the degree of development of the company. If some innovations were introduced at the end of the period (for example, the replacement of equipment with more modern ones), then it is quite natural that there will be some decrease in profits. But in this case, profitability will certainly return to its previous level - and possibly become higher - in the shortest possible time.
About norms
Each indicator has its own norm, including the efficiency of equity capital. If you focus on (for example, such as England and the USA), then the profitability should be in the range of 10-12%. For developing countries whose economies are prone to inflation, this percentage should be much higher.
You need to know that it is not always necessary to rely on the return on equity, the formula for calculating which is presented at the beginning. The value may turn out to be too high, as the indicator is influenced by other financial levers. One of them is the value For such cases exists. It allows you to more accurately calculate the profitability and the influence of certain factors on it.
Eventually
Each owner and investor should be aware of the considered formula. The return on equity is good helper in any line of business. It is the calculations that will tell you when and where to invest your funds, as well as the right moment for their withdrawal. This is very important information in the investment world.
For owners and managers, this indicator gives a clear picture of the direction of activity. The results obtained can suggest how exactly to continue doing business: along the same path or change it radically. And the adoption of such decisions will ensure an increase in profits and greater stability in the market.
Return on equity of the enterprise. Indicators, coefficient and and formula for return on equity
Equity (ROE, i.e. return on equity,) is an indicator of net profit in comparison with the equity of the organization. This is the most important financial indicator of return for any investor, business owner, showing how efficiently the capital invested in the business was used. Unlike the similar indicator "return on assets", this indicator characterizes the efficiency of using not the entire capital (or assets) of the organization, but only that part of it that belongs to the owners of the enterprise.
Return on equity is one of the most important business performance indicators. Any investor, before investing his finances in an enterprise, analyzes this parameter. It shows how competently the assets belonging to the owners and investors are used. The return on equity ratio reflects the value of the ratio of net profit to the company's own funds. It is clear that such a calculation makes sense when the organization has positive assets that are not burdened with borrowing restrictions.
Return on equity ratios
According to average statistics, the return on equity in the US and the UK is approximately 10-12%. For inflationary economies, such as Russia, the figure should be higher. The main comparative criterion in the analysis of return on equity is the percentage of alternative returns that the owner could receive by investing his money in another business. For example, if it can bring 10% per annum, and the business brings only 5%, then the question may arise about the advisability of further conducting such a business.
According to the international rating agency S&P, the return on capital ratio of Russian enterprises was 12% in 2010, the forecast for 2011 was - 15%, for 2012 - 17%. Domestic economists believe that 20% is a normal value for return on equity.
The higher the return on equity, the better. However, as can be seen from the Dupont formula, a high value of the indicator may result from too high financial leverage, i.e. a large share of borrowed capital and a small share of own capital, which negatively affects the financial stability of the organization. This reflects the main law of business - more profit, more risk.
The calculation of the return on equity ratio only makes sense if the organization has equity (i.e., positive net assets). Otherwise, the calculation gives a negative value, which is of little use for analysis.
The following indicators affect the return on equity:
Efficiency of operating activity (net profit from sales);
Return of all assets of the organization;
The ratio of own and borrowed funds.
How to evaluate the return of a business, looking at the profitability ratio?
To do this, it is worth comparing it with indicators of alternative returns. How much will a businessman get if he invests his money in another business? For example, he will attribute the funds to a bank deposit, which will bring 10% per annum. And the profitability ratio of the existing enterprise is only 5%. It is clear that it is inexpedient to develop such a company.
Compare the indicator with the norms that have historically developed in the region. Thus, the average profitability of companies in England and the US is 10-12%. In countries with stable economies, a coefficient in the range of 12-15% is desirable. For Russia - 20%. In each particular state, the values of the indicator are influenced by many factors (inflation, industrial development, macroeconomic risks, etc.).
High profitability does not always mean a high financial result. The higher the ratio, the better. But only when a large proportion of investments are the company's own funds. If borrowed funds predominate, the organization's solvency is at risk.
Thus, a huge debt load is dangerous for the financial stability of the firm. Calculating the return on equity is useful if the company has this very capital. The predominance of borrowed funds in the calculation gives a negative indicator, which is practically not suitable for analyzing the return on business.
Although it is impossible to be categorical about the profitability ratio. Its use in analysis has some limitations. The real income of the owner or investor does not depend on assets, but on operational efficiency (sales). Based on a single indicator of return on own capital investments, it is difficult to assess the productivity of a firm.
Most companies are heavily leveraged. The same banks exist only on borrowed funds (attracted deposits). And their net assets serve only as a guarantor of financial stability.
Whatever it was, but the profitability ratio illustrates the company's income earned for investors and owners.
Return on Equity Formula
The company's return on equity shows the amount of profit that the company will receive per unit cost of equity. For a potential investor, the value of this indicator determines:
The profitability ratio gives an idea of how wisely the invested capital was used.
Owners invest their funds, forming the authorized capital of the enterprise. In return, they are entitled to a percentage of the profits.
The return on equity reflects the amount of profit that the investor will receive from each ruble advanced to the company.
The calculation of the formula for return on equity on the balance sheet is the ratio of net profit for the year to the company's own funds for the same period. The data is taken from the Profit and Loss Statement and the Balance Sheet. If you need to find the coefficient in percent, then the result is multiplied by 100.
Net return on equity formula:
RSK \u003d PE / SK (avg.) * 100, where
RSK - return on equity,
PE - net profit for the billing period,
SC (cf.) - the average size of investments for the same billing period.
Formula calculation example. Firm "A" has own funds in the amount of 100 million rubles. Net profit for the reporting year amounted to 400 million. RSK \u003d 100 million / 400 million * 100 \u003d 25%.
An investor can compare several companies in order to decide where it is more profitable to invest money.
Example. Firm "A" and "B" have the same amount of equity, 100 million rubles. The net profit of enterprise "A" is 400 million, and that of enterprise "B" is 650 million. Substitute the data into the formula. We get that the profitability ratio of the company "A" - 25%, "B" - 15%. The profitability of the first organization turned out to be higher at the expense of its own funds, and not at the expense of revenue (net profit). After all, both enterprises entered the business with the same amount of capital investment. But firm "B" worked better.
The formula for the financial return on equity
To obtain more accurate data, it makes sense to divide the analyzed period into two: calculate income at the beginning and at the end of a certain period of time.
The calculation is:
RSK \u003d PE * 365 (days in the year of interest) / ((SKng + SKkg) / 2), where
SKng - equity at the beginning of the year;
SKkg - the value of own funds at the end of the reporting year.
If the indicator needs to be expressed as a percentage, then the result, respectively, is multiplied by 100.
What numbers are taken from accounting forms?
To calculate net profit (from form No. 2, “Profit and Loss Statement”; line numbers and their names are indicated):
2110 "Revenue";
2320 Interest receivable;
2310 "Income from participation in other organizations";
2340 "Other income".
To calculate the amount of equity capital (from form N1, "Balance sheet"):
1300 “Total for the section “Capital and reserves”” (data at the beginning of the period plus data at the end of the period);
1530 "Deferred income" (data at the beginning plus data at the end of the reporting period).
The formula for calculating the standard rate of return
How to understand that it makes sense to invest in a business? Return on equity shows the normative value. One way is to compare profitability with other options for advance money (investing in shares of other firms, buying bonds, etc.). The normative level of profitability is considered to be interest on deposits in banks. This is a certain minimum, a certain boundary for determining the return of a business.
The formula for calculating the minimum profitability ratio:
RSK (n) \u003d Std * (1 - Stnp), where
RSK (n) - the standard level of return on equity (relative value);
Std - deposit rate (average for the reporting year);
Stnp - income tax rate (for the reporting period).
If, as a result of calculations, the rate of return on invested own financial resources turned out to be less than RSK (n) or received a negative value, then it is unprofitable for investors to invest in this company. The final decision is made after analyzing the profitability over the past few years.
Dupont formula for calculating return on equity
To calculate the return on equity ratio, the Dupont formula is often used. It breaks the coefficient into three parts, the analysis of which allows you to better understand what affects the final coefficient to a greater extent. In other words, this is a three-way analysis of the ROE. DuPont's formula is:
Return on equity ratio (Dupon formula) = (Net income/Revenue) * (Revenue/Assets)* (Assets/Equity)
The Dupont formula was first used in financial analysis in the 20s of the last century. It was developed by the American chemical corporation DuPont. Return on equity (ROE) according to the Dupont formula is divided into 3 components:
Operational efficiency (profitability of sales),
Asset utilization efficiency (asset turnover),
Leverage (financial leverage).
ROE (according to the Dupont formula) = Return on Sales * Asset Turnover * Leverage
In fact, if you reduce everything, you get the formula described above, but such a three-factor selection of components allows you to better determine the relationship between them.
Return on equity ratio
The return on equity ratio is one of the most important ratios used by investors and business owners, which shows how effectively the money invested (invested) in the enterprise was used.
The difference between return on equity (ROE) and return on assets (ROA) is that ROE does not show the effectiveness of all assets (like ROA), but only those that belong to the owners of the enterprise.
This indicator is used by investors and owners of the enterprise to evaluate their own investments in it. The higher the value of the coefficient, the more profitable the investment. If the return on equity is less than zero, then there is reason to think about the feasibility and efficiency of investments in the enterprise in the future. As a rule, the value of the coefficient is compared with alternative investments in shares of other enterprises, bonds and, in extreme cases, in a bank.
It is important to note that too high a value of the indicator can negatively affect the financial stability of the enterprise. Do not forget the main law of investment and business: more profitability - more risk.
Maxim Shilin
Specially for Information Agency"Financial Lawyer"
Definition
Return on equity(return on equity, ROE) - an indicator of net profit in comparison with the equity of the organization. This is the most important financial indicator of return for any investor, business owner, showing how efficiently the capital invested in the business was used. Unlike a similar indicator of "assets", this indicator characterizes the efficiency of using not the entire capital (or assets) of the organization, but only that part of it that belongs to the owners of the enterprise.
Calculation (formula)
Return on equity is calculated by dividing net income (usually for the year) by the equity of the organization:
Return on Equity = Net Income / Equity
To get the result as a percentage, this ratio is often multiplied by 100.
A more accurate calculation involves using the arithmetic average of equity for the period for which net profit is taken (usually for a year) - equity at the beginning of the period is added to equity at the end of the period and divided by 2.
The net profit of the organization is taken according to the "Profit and Loss Statement", equity - according to the liabilities of the Balance.
Return on Equity = Net Profit*(365/Number of days in the period)/((Equity at the beginning of the period + Equity at the end of the period)/2)
A special approach to calculating the return on equity is the use of the Dupont formula. Dupont's formula breaks the indicator into three components, or factors, allowing you to better understand the result:
Return on equity (Dupon formula) = (Net income / Revenue) * (Revenue / Assets) * (Assets / Equity) = Net profit margin * Asset turnover * Financial leverage.
Normal value
According to average statistics, the return on equity is approximately 10-12% (in the US and the UK). For inflationary economies, such as Russia, the figure should be higher. The main comparative criterion in the analysis of return on equity is the percentage of alternative returns that the owner could receive by investing his money in another business. For example, if a bank deposit can bring 10% per annum, and a business brings only 5%, then the question may arise about the advisability of further conducting such a business.
The higher the return on equity, the better. However, as can be seen from the Dupont formula, a high value of the indicator may result from too high financial leverage, i.e. a large share of borrowed capital and a small share of own capital, which negatively affects the financial stability of the organization. This reflects the main law of business - more profit, more risk.
The calculation of the return on equity ratio makes sense only if the organization has equity capital (i.e. positive). Otherwise, the calculation gives a negative value, which is of little use for analysis.
Return on equityis an important indicator of financial analysis. What he talks about and how it is considered, you will learn from our article.
What does return on equity show?
Return on equity, like other indicators of profitability, indicates the effectiveness of the business. More precisely, about how the owners' money invested in the company's capital works. To put it simply, profitability helps to understand how many kopecks of profit each ruble of its own capital brings to the company.
The return on equity is able to give an idea to the investor or its specialists how successfully the company manages to keep the return on capital at the proper level and thereby determine the degree of its attractiveness for investors.
The scorecard has a similar indicator - return on assets ( cm. ). However, in contrast to it, the return on equity makes it possible to judge precisely the work of the net equity of the enterprise. At the same time, the attracted funds spent on the acquisition of property can also interfere with the return on assets.
So how is profitability calculated?
How to Find the Return on Equity Ratio
Profitability is always the ratio of profit to the object whose return must be evaluated. In this case, we consider equity. So, we will share the profit on it.
In financial analysis, the return on equity is usually denoted using the ROE ratio (short for English return on equity). We use this notation, and then the formula for calculating the indicator may look like this:
ROE = Pr / SK × 100,
Pr - net profit (the indicator of return on equity is considered only for net profit).
SC - equity. To make the calculation more informative, an average SC is taken. The easiest way to calculate it is to add the data for the beginning and end of the period and divide the result by 2.
Return on equity is a ratio that is relative in nature, it is usually expressed as a percentage.
Factor analysis of return on equity
Sometimes another formula is used for the calculation - the so-called Dupont formula. It looks like this:
ROE \u003d (Rev / Ext) × (Ext / Act) × (Act / SK),
where: ROE is the desired profitability;
Pr - net profit;
Vyr - revenue;
Act - assets;
SC - equity.
This is the factor analysis of profitability.
Return on equity - balance sheet formula
This indicator can be found not only by calculation, but from reporting documents. So, there is a simple answer to the question of how to find equity on the balance sheet.
To determine the return on equity, the information contained in the lines of the balance sheet (form 1) and in the income statement (form 2) is used.
The balance sheet will look like this:
ROE = line 2400 form 2 / line 1300 form 1 × 100.
For more information about the balance sheet, see the article , and about form 2 - .
Profitability or return on equity - normative value
The main criterion used in assessing the return on equity is the comparison of this indicator with the return on investment in other lines of business, for example, in the securities of other companies.
To assess the effectiveness of investments, the standard value of ROE is widely used. Typically, investors are guided by values from 10 to 12%, which are typical for business in developed countries. If inflation in the state is high, then the return on capital increases accordingly. For the Russian economy, a 20 percent value is considered the norm.
If the indicator goes into the "minus" - this is already an alarming signal and an incentive in order to increase the return on equity. But a significant excess over the normative value is also an unfavorable situation, since investment risks increase.
Results
Profitability or return on equity is important for assessing the effectiveness of the enterprise. To find this indicator, several formulas are used, the data for which are taken from the lines of the balance sheet and the income statement.
