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 the profitability of sales on the balance sheet determines the share of profit per unit of the object in question.
Using the formula for return on sales by balance, you can find out with what degree of efficiency is used equity(company assets), main and working capital and etc.
Profitability of sales shows how much of the profit is in the organization's revenue. In the analysis, the return on sales is denoted by ROS (from the English returnonsales).
General formula for return on sales as follows:
ROS \u003d P / Qp * 100%,
Here ROS is the return on sales;
P - the amount of profit;
Qp - sales volume (revenue).
Return on sales is relative indicator defined as a percentage.
Formula for return on sales by balance sheet
When calculating the profitability of sales on the balance sheet, information is taken from the income statement (form No. 2).
In this case balance sheet profitability 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:
Normative 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 the corresponding coefficients of the norm.
In general, the formula for the profitability of sales on the balance sheet should provide a profitability ratio in the range of 20 to 30%, which reflects the high profitability of the enterprise.
An indicator of up to 5% indicates a low profitability of the company, from 5 to 20% - an average profitability, a profitability indicator of more than 30% indicates super-profitability.
Average values of profitability of sales by industry in our country:
- Agriculture - 10-13%,
- Mining - 25%,
- Construction - 5-10%,
- Trade - 7-8%.
Sales profitability analysis
The formula of profitability of sales on the balance sheet allows the administration of the enterprise to find out the degree of efficiency of the organization of the use of costs in the process of making a profit.
Profitability analysis is needed in the following cases:
- Receipt and increase in profits;
- Company development control;
- Comparison with competitors;
- Detection of profitable and unprofitable products, etc.
Examples of problem solving
EXAMPLE 1
| Exercise | The company has the following indicators taken from accounting records: Revenue (line 2110) 2014 - 206,000 thousand rubles. 2015 - 46,600 thousand rubles. 2016 - 105,500 thousand rubles. Net profit (line 2400) 2014 - 11,000 thousand rubles. 2015 - 3,000 thousand rubles. 2016 - 3,300 thousand rubles. Find the profitability of sales by balance sheet. |
| Solution | Net profit margin formula: ROS=p.2400/p. 2110*100% ROS 2014 = 11,000 / 206,000 * 100% = 5.34% ROS 2015 =3,000 / 46,600 * 100% = 6.44% ROS 2016 = 3,300 / 105,500 * 100% = 3.13% Conclusion. We see that the return on sales in 2015 increased to 6% compared to 2014, but comparing 2015 and 2016, we see that it fell to 3%. At the same time, the profitability is above zero, which indicates a positive result. |
| Answer | ROS 2014 = 5.34%, ROS 2015 = 6.44%, ROS 2016 = 3.13% |
EXAMPLE 2
| Exercise | Calculate the profitability of sales and draw conclusions about its change using the example of the Rusneft enterprise. The following indicators are given from the accounting documentation: Total sales revenue (line 2110) |
Consider the profitability ratio of sales(ROS). This indicator reflects the efficiency of the enterprise and shows the share (in percent) of net profit in the total revenue of the enterprise. In Western sources, the profitability ratio of sales is called - ROS ( return on sales). Below I will consider the formula for calculating this coefficient, give an example with its calculation for a domestic enterprise, describe the standard and its economic meaning.
Profitability of sales. Economic meaning of the indicator
It is advisable to start the study of any coefficient with its economic meaning. What is this ratio for? It reflects the business activity of the enterprise and determines how the enterprise works effectively. The return on sales ratio shows how much Money from the sold products is the profit of the enterprise. What is important is not how many products the company sold, but how much net profit it earned net money from these sales.
The profitability ratio of sales describes the effectiveness of the sale of the main products of the enterprise, and also allows you to determine the share of the cost in sales.
Return on sales ratio. How is profitability calculated? Calculation formula according to balance sheet and IFRS
The formula for return on sales by Russian system financial statements as follows:
Return on sales ratio = Net profit / Revenue = line 2400 / line 2110
It should be clarified that when calculating the ratio, instead of net profit, the numerator can be used: gross profit, profit before taxes and interest (EBIT), profit before taxes (EBI). Accordingly, the following coefficients will appear:
Gross profit margin on sales = Gross profit/Revenue
Operating profit ratio =EBIT/Revenue
Return on sales ratio for profit before taxes =EBI/Revenue
To avoid confusion, I recommend using the formula, where the numerator is net income (NI, Net Income), because. EBIT is calculated incorrectly based on domestic reporting. It turns out following formula for Russian reporting:
In foreign sources, the profitability ratio of sales - ROS is calculated by the following formula:
Video lesson: “Sales profitability: calculation formula, example and analysis”
Profitability of sales. An example of a balance sheet calculation for JSC Aeroflot
Let's calculate the return on sales for Russian company OJSC Aeroflot. To do this, I will use the InvestFunds service, which allows you to get the company's financial statements by quarter. Below is the import of data from the service.
Profit and Loss Statement of JSC “Aeroflot”. Calculation of the profitability ratio of sales
So, let's calculate the profitability of sales for four periods.
Return on sales 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 slightly increased to 6% in the first quarter of 2014, and in the second quarter it doubled to 3%. However, the profitability is greater than zero.
Let's calculate this coefficient according to IFRS. To do this, we take data on financial statements from the official website of the company.
Aeroflot IFRS report. Calculation of the profitability ratio of sales
For the nine months of 2014, the return on sales ratio of JSC Aeroflot 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 can be seen, over the year, the ratio deteriorated 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 return on sales is less than zero, then it is worth seriously thinking about the effectiveness of enterprise management.
What level of sales profitability ratio is acceptable for Russia?
– mining – 26%
– Agriculture – 11%
– construction – 7%
– wholesale and retail – 8%
If you have a low value of the coefficient, then you should improve the efficiency of enterprise management by increasing the customer base, increasing the turnover of goods, reducing the cost of goods / services from subcontractors.
There are many ways to measure the performance of an organization. The main one is to calculate the profitability ratio. It is this indicator that should be taken into account first of all by the owner of the enterprise, taking into account that the profitability of a business is determined by the size of the result obtained in relation to the resources expended.
Based on the analysis of the data obtained during the calculation, we can conclude how the business is developing, what are the strengths and weaknesses of the this moment parties are present in the activities of the enterprise, as well as what actions need to be taken to improve the efficiency of its work.
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One of the important indicators of the results of sales of products is the profitability of sales, which reflects the net income from sales of the company.
Definition and economic meaning
Before proceeding to the methods of calculating profitability, it is necessary to understand its economic meaning. Profitability shows how efficiently a business uses the resources involved.
In general, profitability is calculated in order to:
- control profits;
- track the dynamics of the business;
- compare the results obtained with those of competitors;
- identify which sales are profitable and which are unprofitable.
In relation to sales, the activity of an enterprise should be determined not only in terms of maximizing revenue, but also in terms of net profit from trade turnover. For this purpose, the profitability ratio of sales is calculated, which shows the efficiency of the sale of goods and allows you to determine the percentage of its cost in the total amount of revenue.
Return on sales, assets and equity
When analyzing the activities of an organization, various profitability ratios are usually considered not separately, but in aggregate.
At the same time, the following profitability ratios are the main indicators of the company's performance:
- assets;
- capital;
- sales.
The indicator shows how much profit is received from the sources involved in production - monetary resources, capital and other resources. To determine the return on assets, you need to divide net profit by the amount of assets in annual average terms (the sum of the values for the first and last number year divided by 2) and multiplied by 100%.
Return on assets values are compared on an annual basis to determine how much the actual value differs from the predicted value and what exactly influenced the deviation that took place.
Return on equity is calculated as the result of dividing by 100% the result of dividing net (after paying deductions to the budget) profit by the total value of fixed assets in average annual terms. This ratio reflects the income received from the use of capital assets in the production of goods.
The return on sales makes it clear what proportion of the company's revenue is profit, and is calculated in several ways (depending on the various subtypes of profit), which will be listed below. Based on data on the profitability of sales, the company makes decisions on pricing and the value of related households. cost activities.
Profit Margin Analysis
Having calculated the profitability of sales for several periods, it is possible to determine the dynamics of change attributable to a separate unit of production. The profit margin may vary depending on various factors that will be considered in the factor analysis.
Its increase occurs in the following cases:
- with an increase in revenue, accompanied by a decrease in costs;
- while reducing revenue and expenses, when the latter are reduced faster;
- with higher revenues and slower increases in costs.
The decrease in the indicator occurs under the following circumstances:
- profits and expenses grow at the same time, but expenses increase faster;
- revenue and expenses are declining, but the rate of decrease in revenue is greater;
- expenses go up and revenue goes down.
Other factors also influence the profit margin: inflation, changes in demand for products, and competing firms.
Calculation formulas
Return on sales is determined by three different methods:
- by using the amount of net profit in the calculation;
- through a preliminary calculation of gross profit;
- based on operating income.
By net profit
Formula for determining profitability in this case next:
R = [net profit]/[revenue]*100%
The value, as a rule, is calculated over several periods - only then can an objective assessment of the company's performance and its payback be obtained.
On the basis of sharp changes in the coefficient or, conversely, its stability, one can obtain general idea about company:
- how competently decisions are made;
- whether the attracted resources are used effectively;
- what are the successes and problems of the organization.
By gross profit
In order to determine the gross profit, you need to subtract the cost of production from the revenue.
The formula for calculating the gross profit ratio is as follows:
R = [gross margin]/[revenue]*100%
By operating profit
To calculate the profitability of sales for the company's main line of business, you first need to determine the operating profit by subtracting direct and operating expenses from net profit.
Operating profit margin formula:
R = [operating profit]/[revenue]*100%.
By balance
All the necessary values for calculating the profitability of sales according to the above formulas are taken from the balance sheet and form 2, reflecting financial results companies.
In this case, the formula for calculating the coefficient on the balance will depend on what type of profit is determined by profitability:
Coefficient calculation example
Initial data:
- sales revenue for 2020 amounted to 21 million rubles;
- net profit for 2020 - 6.2 million rubles;
- sales revenue for 2020 - 24.4 million rubles;
- net profit for 2020 - 6.46 million rubles;
To determine the change in sales profitability in 2020, you must first calculate the value of profitability in 2020.
Plugging the values into the formula above gives the following result:
R2015 = 6.2: 21 = 0.295 or 29.5%
R2016 = 6.46: 24.4 = 0.265 or 26.5%
By subtracting one coefficient from the other, you can get the percentage change in profitability:
R = R2016 - R2015 = 26.5 - 29.5 = -3%
In this way, given example shows that in 2020 the decrease in profitability was significant - the indicator decreased by 3%.
Normative value at the enterprise
There is no specific standard for the return on sales ratio. Any value above zero is a good indicator. If Krp<0, то руководству стоит всерьез задуматься об эффективности управления компанией.
If we proceed from the statistical data available for various sectors of the national economy, then we can focus on the following average values for Russia:
With a low or negative coefficient, the management of the organization must change the methods of managing the enterprise, increasing the efficiency of its work by expanding the customer database, increasing the rate of asset turnover and reducing the purchase cost of raw materials, goods or services from contractors.
The dynamics of change and its impact
Thanks to the analysis of profitability of sales, you can get an accurate and objective assessment of the current state of affairs of the company. Considering that this coefficient reflects the most important result of the enterprise's activity - the sale of products, the development trend of the organization can be determined depending on the increase or decrease in the coefficient.
Increase in indicator
The increase in the return on sales ratio in general is a good indicator, but depending on its causes, it can have a different shade.
A favorable trend is when revenue growth outpaces cost growth. This means that the company manages to contain the increase in variable costs, which in this case increase non-linearly.
If the coefficient increases due to the fact that both costs and revenues are simultaneously reduced, and the latter decreases more slowly, then this trend can no longer be unambiguously called favorable, although the coefficient formally increased. This situation requires a deeper analysis in order to be able to determine why the revenue has decreased.
Finally, the most optimal scenario is to increase revenue while reducing costs. In this case, the company should analyze why this is happening, and in the future try to stick to this course of events.
Decrease in indicator
The decrease in the profitability of sales is negative in any case, regardless of the nature of changes in revenue and costs.
To correct the current trend, the company must take appropriate actions (depending on the reasons that led to the decrease in the indicator):
- revise pricing and marketing policies;
- change the assortment of goods;
- reduce costs.
Factor analysis
In order to understand why there was an increase or decrease in the profitability ratio of sales, factor analysis is used, with which you can find out the strengths and weaknesses of the company's activities and predict the company's further development strategy.
The increase in revenue while reducing costs is due to the following reasons:
- sales growth;
- change in the range of goods;
- reduced cost control.
A decrease in revenue at a lower rate of decrease in costs may occur due to rising prices for goods and changes in the assortment.
The following factors influence the simultaneous growth of revenue and expenses at a lower rate of the latter:
- cost reduction;
- price increase;
The reasons for the growth of revenue and expenses that increase faster, as a rule, are the following:
- increase in the cost of goods;
- high price level;
- structural change in the range.
All sales are carried out to achieve the same goal - financial profit. But it is impossible to give an objective assessment of the effectiveness of sales without an indicator of their profitability.
What is profitability?
Profitability of sales, also known as the profitability ratio of sales, is a percentage of the share of profit from each ruble earned. In other words, return on sales is the ratio of net income to the amount of proceeds from the sale of products, multiplied by one hundred percent.
Some entrepreneurs are deluded into thinking that return on sales represents the return on investment. It is not right. The profitability ratio of sales allows you to determine what amount of money in the volume of products sold is the profit of the enterprise minus tax and related payments.
This profitability indicator shows the profitability solely from the sales process itself. That is how much the cost of the goods pays for the costs of the production process of the goods/services (purchase of the necessary components, use of energy and human resources, etc.).
When calculating the coefficient, such an indicator as the amount of capital (volume of working capital) is not taken into account. Thanks to this, you can safely analyze the profitability of sales of competing enterprises in your segment.
What does ROI show an entrepreneur?
- The profitability ratio of sales allows you to characterize the most important thing for a company or enterprise - the sale of the main products . In addition, the share of the cost in the sales process is estimated.
- Knowing the profitability of sales, the company can control pricing and costs . It is worth noting that different companies produce goods using different strategies and techniques, which causes different profitability ratios. But even if revenue, operating costs, and pre-tax earnings are equal for two companies, their return on sales will be different. This is due to the direct impact of the amount of interest payments on the total amount of net profit.
- Return on sales is not a reflection of the planned effect of long-term investments . The bottom line is that if the company decides to change the technological scheme or purchase innovative equipment, then this coefficient may slightly decrease. But he will regain his position and surpass them if the modernization strategy was chosen correctly. By the way, if you want to improve the profitability indicator, read the article "increasing the profitability of sales".
How to calculate return on sales?
To calculate the profitability ratio of sales, the following formula is used:
ROS- the English abbreviation Return on Sales, which in translation into Russian actually means the desired profitability ratio, presented as a percentage;
N.I.- English abbreviation Net Income, net profit indicator, expressed in monetary terms;
NS- English abbreviation Net Sales, the amount of profit received from the sale of manufactured products, expressed in monetary terms.
Correct initial data and a dry calculation will allow you to derive the real profitability of sales. The formula for profitability of sales is simple - the result obtained is an indicator of production efficiency.
An illustrative example of calculating profitability:
Unfortunately, the general formula for return on sales can only show the efficiency or inefficiency of the company, but does not give an answer about the problem areas of the business.
Suppose, after analyzing the profitability data for 2 years, the company received the following figures:
In 2011, the company made a profit of 2.24 million dollars, in 2012 this figure increased to 2.62 million dollars. Net profit in 2011 was 494 thousand dollars, and in 2012 - 516 thousand dollars. What changes has undergone sales profitability in 2012?
The profitability ratio for 2011 is equal to:
ROS2011 = 594 / 2240 = 0.2205 or 22%.
The profitability ratio for 2012 is equal to:
ROS2012 = 516 / 2620 = 0.1947 or 19.5%.
Let's calculate the final change in sales profitability:
ROS = ROS2012 - ROS2011 = 22 - 19.5 = -2.5%.
In 2012, the profitability of sales of the enterprise decreased by 2.5%.
Here you can see that profitability has decreased by 2.5% over 2 years, but the reasons are not clear until a more detailed analysis is made. It includes:
- Examine the change in tax costs and deductions that are required to calculate in NI.
- Calculation of the profitability of a product / service. Formula:
Profitability \u003d (revenue - cost * - costs) / revenue * 100%
- The profitability of each sales manager. Formula:
Profitability \u003d (revenue - salary * - taxes) / revenue * 100%.
- Advertising profitability of goods/services. Formula:
*If you provide services, then the cost includes: organization of a workplace for sales managers (computer equipment, rent of sq.m., telephone equipment, utility payments proportional to a person, etc.), their salary, telephone costs, advertising, costs for the necessary software (CRM, 1C, etc.), payments for a virtual PBX.
We note right away that it is possible to use a simpler formula for the return on sales: ROS = GP (gross profit) / NS (total revenue). But it is more appropriate for calculating “narrow” indicators (profitability for each manager, for a specific product, for a page on a website, etc.).
It is important to note that each manager can have a different sales structure: someone sells only expensive and rarely, someone small, but often - this will be the main difficulty in calculating the net profit (margin after taxes). It is necessary to resort to the margin data of each product for each seller using CRM.
- Calculation of sales volumes and margins. Perhaps the profitability has fallen because. the most marginal goods ceased to be on sale.
| Site sale | Sale of contextual advertising | |
|---|---|---|
| Profitability by formula | (500K - 135K - 90K for taxes)/500K = 55% | (900k - 600k - 162k for taxes)/900k = 15% |
| Sales volume per month | 500 thousand rubles (cost of 5 sites) | 900 thousand rubles (cost of 3 projects) |
| Material costs | 15 thousand rubles (buying a domain, paying for software, advertising, etc.) | 600 thousand rubles (money given to advertising services, etc.) |
| Labor costs | 120 thousand rubles. (salary for at least 3 employees) | 40 thousand rubles. (salary for 1 employee) |
We said above that part of increasing the profitability of sales is to reduce costs and expenses. But, at the same time, we recommend that you be careful with this item. negative consequences may follow in the form of a deterioration in the quality of goods (services), a decrease in the efficiency of specialists. To avoid this, it is necessary to approach the issue of increasing the profitability of sales comprehensively! It includes a study: The table shows that, despite the fact that contextual advertising brought more money to the company's current account, its profitability is 3.7 times lower. This means that if managers start selling sites poorly, but contextual advertising is good, then a decrease in profitability cannot be avoided.
- competitors
- Sales and cost structures
- Sales channels
- CRM usage
- Manager effectiveness
After studying all this, you can proceed to the development of tactics and sales strategies. And only now to make operational decisions.
The completed data shows that it is possible to increase the costs per page of offices. they provide the highest return on business.
Calculating profitability for all layers is a rather laborious task, especially if you have not done this before, and you need an analysis for several months or even years (more than one week). And still, in the end, you can get an answer to the question “where are the strongest and weakest points”, but not understand what and how to do next. Therefore, we offer you our assistance in collecting, analyzing, recommending, executing and monitoring the optimization of the sales department to increase the profitability of the business.
The degree of economic efficiency of a financial, labor or material resource characterizes such a relative indicator as profitability. It is expressed as a percentage and is widely used to evaluate the performance of a commercial enterprise. There are many types of this concept. Any of them is the ratio of profit to the asset or resource under study.
The essence of the concept of profitability ratio
The profitability ratio of sales shows the business activity of the enterprise and reflects the efficiency of its work. Evaluation of the indicator allows you to determine how much money from the sale of products is the profit of the company. What matters is not how much product was sold, but how much net profit the company earned. With the help of the indicator, you can also find the share of cost in sales.
The profitability ratio of sales is analyzed, as a rule, in dynamics. An increase or decrease in an indicator indicates various economic phenomena.
If profitability increases:
- The increase in revenue occurs faster than the increase in costs (either increased sales volumes, or changed the assortment).
- Costs are declining faster than revenue is declining (the company has either raised product prices or changed the assortment structure).
- Revenue is growing, and costs are becoming smaller (prices have increased, assortment has changed, or cost rates have changed).
The first two situations are definitely favorable for the company. Further analysis is aimed at assessing the sustainability of this situation.
The second situation for the company cannot be called unambiguously favorable. After all, the profitability indicator has improved formally (revenue has decreased). To make decisions, analyze pricing, assortment.
If profitability declined:
- Costs are rising faster than revenue (due to inflation, price cuts, increased cost rates, or changes in product mix).
- The decrease in revenue is faster than the decrease in costs (sales fell).
- Revenues are getting smaller and costs are getting bigger (cost rates have increased, prices have gone down, or the assortment has changed).
The first trend is clearly unfavorable. An additional analysis of the causes is needed to correct the situation. The second situation indicates the desire of the company to reduce its sphere of influence in the market. When a third trend is found, pricing, assortment, and cost control systems need to be analyzed.
How to Calculate Return on Sales in Excel
The international designation of the indicator is ROS. The return on sales ratio is always calculated from the sales profit.
Traditional formula:
ROS = (Profit/Revenue) * 100%.
In specific situations, it may be necessary to calculate the share of gross, balance or other profit in revenue.
Gross return on sales (margin) formula:
(Gross Profit / Sales Proceeds) * 100%.
This indicator shows the level of "dirty" money (before all deductions) earned by the company from the sale of products. The elements of the formula are taken in monetary terms. Gross profit and revenue can be found in the income statement.
Information for calculation:
In the cells for calculating the gross margin, set the percentage format. We enter the formula:
Gross profit margin for 3 years is relatively stable. This means that the company carefully monitors the pricing procedure, monitors the product range.
Return on sales by operating income (EBIT):
(Operating profit / sales revenue) * 100%.
The indicator characterizes how much operating profit falls on the ruble of revenue.
((p. 2300 + p. 2330) / p. 2110) * 100%.
Data for calculation:
Calculate the operating profit margin - substitute the references to the required cells in the formula:
The formula for return on sales by net profit:
(Net profit / revenue) * 100%.
Net profitability shows how much net profit falls on the ruble of revenue. Both figures are taken from the income statement.
Let's show the profitability ratio of sales on the chart:
In 2015, the indicator is significantly reduced, which is regarded as an unfavorable phenomenon. Additional analysis of the assortment list, pricing and cost control systems is needed.
A value above zero is considered normal. A more specific range depends on the field of activity. Each enterprise compares its sales profitability ratio and the standard value for the industry. It is good if the calculated indicator practically does not differ from the inflation rate.