Profitability of own capital threshold. How is the profitability coefficient of own capital calculated? What mistakes do people do when using ROA and ROE
Own capital characterizes the return on the investment of shareholders from the point of view of the profit received by the company. This coefficient may be denoted by the abbreviation Roe. (return. of. investment.) and have another name - on the share.The calculation is made by the formula:
Net profit includes dividends paid on privileged shares, but excludes those that are paid on ordinary securities. Capital value does not take into account preferred shares.
What is the cost of profitability of equity?
It makes it possible to judge how efficiently used. It is important to consider: the coefficient demonstrates the effectiveness of only the part of the capital, which belongs to the owners of the company. The ROE indicator is considered not the most reliable indicator of the financial condition of the organization - it is assumed to believe that it overestimates the value of the company.
Allocate five basic methods of interpretation of the value:
1. Depreciation. The high value of ROE allows you to judge non-uniform depreciation.
2. Rose growth. Companies that grow rapidly have a low ROE.
3. Duration of the project. Long-term projects are characterized by a high ratio of the coefficient.
4. Temporary break. The longer the time period between investment spending and returns from them, the higher the ROE.
Consider profitability of capital Enterprises. Divide into the analysis of two coefficients, which determine the profitability of capital: profitability of equity (ROE), profitability involved capital (ROCE).
Definition of profitability coefficients of own and capitalized capital
Profitability ratio of equity (RETURN ON EQUITY, ROE) Shows how effectively their own funds were invested in the enterprise.
Capital profitability coefficient(RETURN ON CAPITAL EMPLOYED, ROCE) Shows the effectiveness of investment in the enterprise of both own and attracted funds. The indicator reflects how effectively the company uses its own capital and long-term funds (investments) in its activities.
To understand the profitability of capital, we will analyze and compare the two coefficients ROE and ROCE. In comparison, the differences from each other will be visible. The papers of two capital profitability coefficients will be as follows: Consider the economic essence of coefficients, formulas for calculation, standards and make their calculation for the domestic enterprise.
Profitability of capital. Economic essence
The profitability coefficient of involved capital (ROCE) is used in practice by financial analysts to determine the profitability that an enterprise brings to invested capital (both own and attracted).
What is it for? In order to be able to compare the calculated profitability ratio with other types of business to justify fund investment.
Profitability of all capital. Comparison of indicatorsRoe. andROCE.
| Roe. | ROCE. | |
| Who uses this coefficient? | Owners | Investors + owners |
| Keyfulness | As investment in the enterprise uses equity capital | As an investment in the enterprise, both own and attracted capital (through shares) are used. In addition to this net profit, it is impossible to forget the subtraction of dividends. |
| Formula of calculation | \u003d Net profit / own capital | \u003d (Net profit) / (equity capital + long-term commitments) |
| Regulatory | Maximization | Maximization |
| Industry for use | Any | Any |
| Evaluation frequency | Annually | Annually |
| Accuracy of the Company's finance assessment | Less | More |
To better understand the difference between capital profitability coefficients, remember that if the company has no preferred shares (long-term liabilities), then the value is ROCE \u003d ROE.
How to read capital profitability?
If the capital profitability coefficient (ROE or ROCE) decreases, this suggests that:
- Increases its own capital (as well as debt obligations for ROCE).
- Asset turnover decreases.
If the capital profitability coefficient (ROE or ROCE) grows, then this suggests that:
- Increases company profits.
- Increases financial lever.
Profitability of capital. Synonyms for coefficients
Consider synonyms for the profitability of equity and profitability of the capital involved, because Often in the literature in different way they are called. It is useful to know all the names to avoid confusion in terms.
| Synonyms of profitability of equity (ROE) | Synonyms of profitability involved capital (ROCE) |
| profitability of equity | profitability of attracted capital |
| Return on Equity. | profitability of share capital |
| Return ON Shareholders' Equity | profitability indicator of ordinary share capital |
| efficiency of own capital | the coefficient of involved capital |
| Return On Owners Equity | RETURN ON CAPITAL EMPLOYED |
| profitability of nested capital |
Figure below shows the accuracy of the assessment of the state of the enterprise using various coefficients.
The coefficient of activated capital (ROCE) is useful for analyzing enterprises where there is a high intensity of capital use (investment is often carried out). This is due to the fact that the coefficient of funds involved uses in its calculation the funds raised. The use of the coefficient of covered capital (ROCE) allows you to make a more accurate conclusion about the financial results of companies.
Profitability of capital. Formulas for calculation
Calculation formulas for capital profitability.
Profitability ratio of equity \u003d net profit / own capital \u003d
p.2400 / p.1300.
Coefficient coefficient \u003d net profit / (own capital + long-term liabilities) \u003d
p.2400 / (p.1300 + p.1400)
In a foreign embodiment, the formula for the profitability of its own and profitability involved capital will be as follows:
NET INCOME - Net profit,
Preferred Dividends - Dividends on preferred shares,
Total Stockholder Equity is the value of ordinary share capital.
Another foreign formula (according to IFRS) for the profitability of the capital gained:
Often in foreign sources in the ROCE calculation formula, EBIT is used (profit before taxes and interest), net profit is often used in Russian practice.
Video lesson: "Profitability of Invested Capital"
Profitability capital. Calculation on the example of OJSC Mechel
In order to still figure out what kind of capital returns, we consider the calculation of the two coefficients for the domestic enterprise.
To estimate the profitability of equal capital OJSC "Mechel", we take financial statements from the official website in four periods of 2013 and calculate ROE and ROCE.
Capital profitability for OJSC "Mechel" -1
Capital profitability for OJSC "Mechel" -2
Profitability of capital OJSC "Mechel"
The profitability coefficient of equity 2013-1 \u003d -3564433/126519889 \u003d -0.02
Profitability ratio of equity 2013-2 \u003d -6367166/123710218 \u003d -0.05
The profitability coefficient of equity capital 2013-3 \u003d -10038210/120039174 \u003d -0.08
The profitability coefficient of equity capital 2013-4 \u003d -27803306/102274079 \u003d -0.27
The profitability coefficient of the capital gained 2013-1 \u003d -3564433 / (126519889 + 71106076) \u003d -0.01
The profitability coefficient of the capital gained 2013-2 \u003d -6367166 / (123710218 + 95542388) \u003d -0.02
The profitability coefficient of the capital gained 2013-3 \u003d -10038210 / (120039174 + 90327678) \u003d -0.04
The profitability coefficient of the capital gained 2013-4 \u003d -27803306 / (102274079 + 89957848) \u003d -0.14
Not quite successfully chose an example of an enterprise balance, since the profitability for all periods was less than 0, which indicates the ineffectiveness of the enterprise. However, the total calculation for capital profitability coefficients is clear. If we had an income, the ratio of these two coefficients was as follows: ROE\u003e ROCE. If we consider the profitability of the company's assets (ROA) in the ratio with capital profitability coefficients, then the inequality will be as follows: ROA\u003e ROCE\u003e ROA.
The company can be considered as a potential object for investing when ROCE (and respectively and ROE)\u003e risk-free / low-risk investments (for example, bank deposits).
Summary
So, we reviewed the profitability of capital. It includes the calculation of two coefficients: the profitability coefficient of equity (ROE) and the profitability coefficient of cope with capital (ROCE). Capital profitability is one of the key indicators of the effectiveness of the enterprise on a number with such coefficients as: the profitability of the asset and profitability of sales. You can read in more detail about the profitability ratio of sales you can read in the article: "". The new coefficients are useful to calculate the owners of the enterprise and investors to search for a suitable investment object.
Definition
Profitability ratio of equity(ROE) is a ratio of net profit to the average value of equity. When calculating this coefficient, an accounting balance of the enterprise is used.
The profitability indicator of equity capital is the determining indicator for strategic investors that determine their own investments for the long-term period over one year. The profitability formula of equity on balance sheet shows how managers and owners of the company carry out capital management, and which rate of profit is created by them on the existing capital.
Formula of the profitability of equity on balance
An indicator of profitability of equity can be calculated in accordance with the data of the form of accounting reporting No. 2 - the income statement. Formula profitability of equity balance on balance new form An accounting balance):
Roe.\u003d (p.2400 / p. 1300) * 100%
In this formula, the line 2400 is taken from the report on financial results (form No. 2), and the line 1300 of the balance sheet (form No. 1).
The total profitability of equity on balance sheet is as follows:
ROE \u003d PE / SK
Here emer - net profit,
SC - own capital.
According to the old form of the balance, the formula looks like this:
ROE \u003d (line190) / (1/2 * (line 490 at the beginning of the year + line 490 at the end of the year)
The profitability of equity can also be painted through the profitability of assets, while the formula will take the following form:
ROE \u003d ROA / ((1-CC) / APSG)
Here ZS - borrowed funds,
APSG - the average annual size of assets and liabilities.
The ROA indicator shows the number of profits that its property brings. ROA is depending on the profitability ratio of sales (ROS), reflecting the net profit rate in accordance with the amount of products implemented.
Roa \u003d PE / Sakk
Here emer - net profit,
Sakk - the average annual value of assets.
Roa \u003d Row 190 / (1/2 * (line 300 at the beginning of the year + line 300 at the end of the year))
ROS \u003d PP / Q
PP - Profit from sales,
Q - sales of goods.
ROS \u003d Row 50 (F№2) / Row 010 (F№ 2)
What shows the profitability formula of equity
With an increase in sales of products, the increase in sales profitability causes an increase in the profitability of assets and profitability of equity capital. Following this, the investment attractiveness of the enterprise is growing.
Formula of the profitability of equity on balance Reflects the amount of profit obtained by the organization per unit value of equity.
ROE is used when making enterprises and choosing the maximum investment attractive objects for investment. Strategic investors are investments directly into the authorized capital of enterprises in exchange for a part of the company's profits. For this reason, the ROE indicator is the most important indicator of the investment attractiveness of enterprises and the effectiveness of management work.
Examples of solving problems
Example 1.
| The task | The company "Student" has the following performance indicators reporting period:
Own capital at the beginning of 2016, 1,255 thousand rubles. Equity at the end of 2016 - 1,311 thousand rubles. Annual profit - 180 thousand rubles. Determine the profitability of the company's own capital. |
| Decision | Calculate the average annual value of equity: SK \u003d (1255 + 1311) / 2 \u003d 1283 thousand rubles. The profitability of equity on balance sheet is as follows: ROE \u003d PE / SK ROE \u003d 180/1283 \u003d 0.14 (or 14%) Output. We see that 1 ruble of funds, which is invested in equity, provides a profit in the amount of 0.14 rubles. |
"There are former classmates, one was in school excellent, the other is a two-way.
Excellent - thin, broken. Two - in a costume from Versace, on the 600th Merc.
Excellent:
- Listen, Vasya, say, have you become a businessman? But how do you consider money, you have some two twins at school in mathematics!
- Yes, everything is simple: I buy for 2 dollars, selling 4; Here on these 2 percent and live. "
The anecdote from distant nineties demonstrates what kind of differences about profitability can be. As, in fact, many different indicators measure this yield.
One of them is the profitability profitability coefficient of ROE. The formula for calculating this financial indicator, its application and economic meaning - in the article below.
Types of profitability
The purpose of each investor is to invest money as efficiently as possible, that is, to get a minimum of investment maximum profitability. The profitability of the enterprise can be compared with its economic efficiency, as it shows how much additional cost the company is able to generate during the period of time (as a rule, per year), which in turn reflects the overall rationality of using its resources to 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 that are calculated by comparing absolute. Profitability is just a relative indicator.
Profitability compares B. general Various absolute indicators with a net profit of the company in percentage, as it were, showing what fraction from the absolute indicator is net income, thereby describing including its payback.
The following types of profitability are most often distinguished:
- The profitability of assets - characterizes how effectively the assets of the company are able to generate profits, shows the share of net profit in the company's assets.
- Profitability of equity - characterizes how effective equity (not burdened by obligations) is able to generate net profit, shows the share of net profit in its own capital.
- The profitability of sales - characterizes the efficiency of sales, shows the proportion of net profit in the company's revenue.
Profitability multipliers
To compare some companies with others and calculate values different species Profitability There is a group of special multipliers. Main them of them:
- ROA (RETURN ON ASSETS - the profitability of assets);
- ROE (RETURN ON EQUITY - Return on equity);
- ROS (RETURN ON SALES - sales profitability).
As an example of the calculation of profitability, we calculate the specified multiplers for Rosneft. To fulfill the task, we take the reporting of the company under IFRS for 2016 (for calculating multipliers, as a rule, annual reports are taken). From this reporting to obtain the source data, we will need a balance sheet and income / loss statement.
Figure 1. Balance report of Rosneft company
To calculate ROA, we will need the total value of the assets that we can take from the balance sheet report, the lines of "total assets" - 11,030 billion rubles. From the profits and loss report, you should take the value of net profit in the relevant line - 201 billion rubles.
The formula for calculating the profitability of assets is the ratio of net profit 201 billion rubles to the company's assets of 11,030 billion, multiplied by 100, that is, equal to 1.8%. Traditionally, ROA is the smallest value from the described multipliers.
Fig. 2. Report on the profits and losses of Rosneft company
To calculate ROE, we need your own capital of the company, which is indicated in the balance line - 3,726 billion rubles. But it can also be calculated as an assets difference of 11,030 billion rubles. and the sum of short-term liabilities (which should be paid in the next 12 months) 2,773 billion rubles. and long-term liabilities (which should be paid over 12 months) 4,531 billion rubles, that is, a total of 7,304 billion rubles.
It turns out that the value of equity equals is 3,726 billion rubles. The next step is to divide the net profit of 201 billion rubles. on own capital 3726 billion rubles. And multiply by 100, that is, get ROE, equal to 5.39%. It is somewhat more than ROA, since, as a rule, the company also attracts a borrowed company in addition to equity.
To calculate the profitability of sales, you should take the value of net profit from the profit and loss statement 201 billion rubles. and the value of revenue from a similar report 4 887 billion rubles. Next should be divided by the value of net profit 201 billion rubles. The value of revenue is 4,887 billion rubles. And multiply by 100 to bring to percentage. It turns out that ROS is 4.11%.
Output
In connection with the volatility of pure revenue, the cost of business profitability is advisable for several periods, while comparing it with similar indicators of other industry companies. Profitability shows the overall feasibility of investors - if it is lower than the profitability of risk-free tools, then investors may prefer them.
Profitability does not reflect the market value of shares. If the company shows good profitability, often its shares are greatly overvalued by the market. Therefore, buying paper such companies is better on correction. And the readings of multipliers of profitability to compare with the data of income multipliers - P / E, P / B, P / S.
Source: "OpenTrainer.ru"
Profitability of equity
When analyzing the financial statements, the profitability coefficient of equity is used to assess the profitability and profitability of the enterprise.
Definition: The profitability coefficient of equity is calculated as the ratio of net profit on the average annual amount of equity.Designation in Formulas (Acronym): ROE
Synonyms: value (price) of share capital, profitability of equity, Return on Equity, Return on Shareholders' Equity
Formula for calculating the indicator profitability of equity:
where ROE is the profitability of equity (Return on Equity),%
Ni - Net profit (NET INCOME), rub
EC - equity (Equity Capital), rub
Purpose. The coefficient of capital profitability characterizes the efficiency of capital use and shows how much an enterprise has a net profit from the ruble of advanced in capital.
Note. When analyzing, it is advisable to keep in mind that net profit reflects the results of the activity and the current level of prices for goods and services mainly over the past period.
Own capital is developing for a number of years. It is expressed in the accounting estimate, which can differ much from the current market value of the company.
For more detailed analysis, you can use the method of 4 factor analysis of yield of equity.
Net profit is part of the gross (book) profits, and spending a 3-factor analysis of gross profits, one can judge the changes in the net profit itself.
Example. Determine the ratio of the profitability of the company's own capital compared with the average consumer indicator.
Net profit of the company amounted to 211.4 million rubles.
Volume of advanced capital of 1709 million rubles.
The average consumer value of the ratio of the profitability of equity - 24.12%.
Calculate the value of the ratio of profitability of equity for the enterprise:
ROEPR \u003d 211.4 / 1709 \u003d 0.1237 or 12.37%.
Determine the ratio of capital profitability:
ROEPR / ROExo \u003d 12.37 / 24,12 \u003d 0.5184 or 51.84%.
The profitability of the equity capital of the enterprise is 51.84% of the medium-separable value of the coefficient.
Source: "Investment-analysis.ru"
Determine the profitability of equity
Profitability of equity - an important indicator of financial analysis. Profitability of equity, as well as other profitability indicators, testifies to business efficiency. More precisely, the owners invested in the capital of the company are working.
If it is easier to speak, profitability helps to understand how many kopecks profit brings the company every ruble of its own capital. The profitability of equity is able to present an investor or its specialists how successfully the company is managed to hold the return on capital at the proper level and thereby determine the degree of attractiveness of it for investors.
In the system of indicators there is a similar indicator - the profitability of assets. However, in contrast to it, the profitability of equity makes it possible to judge exactly the work of the pure equity of the enterprise. While the revenues of assets spent on the purchase of property may intervene in the profitability of assets.
How to find a profitability profitability coefficient
Profitability is always the ratio of profit to the object, the return on which you need to evaluate. In this case, we consider our own capital. So, we will share profits.
In financial analysis, the profitability of equity capital is customary to be denoted by the ROE coefficient (reduction from the English Return on Equity). We use this designation, and then the formula for calculating the indicator may look like this:
ROE \u003d PR / SK × 100,
Pr - net profit (the profitability indicator of equity is considered only by net profit).
CC - own capital (SC). In order for the calculation to be more informative, the average SC is taken. The easiest way to calculate it is to fold the data at the beginning and end of the period and divide the result by 2.
The profitability of equity - the coefficient that is relative, it is expressed, as a rule, in percent.
Factor analysis of profitability of equity capital
Sometimes it is used to calculate another formula - the so-called Dupon formula. It has the following form:
ROE \u003d (PR / VIS) × (VIS / ACT) × (ACT / SC),
where: Roe is the desired profitability;
Pr - net profit;
VIS - revenue;
Act - assets;
SC - own capital.
Profitability of equity - Balance formula
This indicator can be found not only by the calculation method, but from reporting documents. So, there is a simple answer to the question of how to find your own balance on balance. To determine the profitability of equity, the information contained in the balance sheets (form 1) is used and in the report on financial results (form 2). Balance formula will look like this:
ROE \u003d Row 2400 forms 2 / string 1300 forms 1 × 100.
Profitability or profitability of equity - regulatory value
The main criterion used in assessing the profitability of equity is to compare this indicator with the profitability of investments in other business areas, for example, in securities of other companies.
To assess the effectiveness of investments, the regulatory value of ROE is widely used. Typically, investors are oriented from 10 to 12%, which are characteristic of business in developed countries. If inflation in the state is large, then the profitability of capital is growing accordingly. For the Russian economy is considered the norm of 20 percent.
If the indicator goes into a "minus" is an alarming signal and incentive to increase the yield of equity. But a significant excess of the regulatory value is also an unfavorable situation, as investment risks are increasing.Profitability or profitability of equity is important to assess the efficiency of the enterprise. To find this indicator, several formulas are used, the data for which is taken from the balance sheet lines and the report on financial results.
Source: "Nalog-nalog.ru"
ROE - indicator calculation formula
Return on equity, Return on Shareholders' Equity, ROE) shows the efficiency of using its own attachments and is calculated in the percentage ratio. Calculated by the formula:
ROE \u003d NET INCOME / AVERAGE SHAREHOLDER'S EQUITY
ROE \u003d NET INCOME / AVERAGE NET ASSETS
where Net Income is net income before dividend payments on ordinary shares, but after the payment of dividends on preferred shares, since its own capital does not include preferred shares.
ROE can also be submitted in the following form:
ROE \u003d RO * financial lever coefficient
From the ratio it can be seen that proper use borrowed funds makes it possible to increase shareholder income due to the effect of the financial lever. This effect is achieved due to the fact that the profit received from the company's activities is significantly higher than the loan rate. According to the magnitude of the financial lever, it is possible to determine how attracted funds are used - for the development of production, either for Latan holes in the budget.
Obviously, with good management of the company, the value of this indicator should be more than one.
On the other hand, too high mean The financial lever is also bad, as it can be associated with a high risk, as it indicates a high proportion of borrowed funds in the assets structure. The higher this share, the greater the likelihood that the company will remain without net profit, if suddenly collides with any minor difficulties.
A special approach to the calculation of the indicator is the use of a DuPon formula that breaks the ROE to the components that allow you to deeper the resulting result:
ROE (Formula Dupont) \u003d (net profit / revenue) * (revenue / assets) * (assets / own capital)
ROE (Formula DuPona) \u003d Net profit profit * Asset turnover * Financial leverage
In the Russian accounting system, the formula of the profitability ratio of equity takes the form:
ROE \u003d net profit / average annual cost of equity * 100%
ROE \u003d p. 2400 / ((p. 1300 + pp. 1530) at the beginning of the period + (p. 1300 + pp. 1530) at the end of the period) / 2 * 100%
ROE \u003d Net profit * (365 / Number of days in the period) / The average annual cost of equity * 100%
According to many analyst economists, when calculating the coefficient, it is advisable to use a net profit indicator. This is explained by the fact that the profitability of equity is characterized by the level of profits that owners are obtained per unit of invested capital.
The indicator characterizes the efficiency of using its own sources of financing of the enterprise and shows how much net profit is earned with 1 ruble of own funds.ROE allows you to determine the efficiency of capital use invested by owners, and compare this indicator with the possible revenue from the investment of these funds into other activities. In world practice, the ROE indicator is used as one of the main indicators of bank competitiveness.
Source: "AFDANALYSE.RU"
Profitability of equity
Profitability of own capital (RETURN ON EQUITY, ROE) - a net profit in comparison with its own capital of the organization. This is the most important financial performance indicator for any investor, the owner of the business showing how effectively the invested capital was used.
Calculation (formula)
The profitability of equity is calculated by dividing net profit (usually, per year) to own capital of the organization:
Profitability of equity \u003d net profit / own capital
To obtain a result as a percentage, the specified ratio is often multiplied by 100.
A more accurate calculation implies the use of the average arithmetic value of equity for the period for which the net profit is taken (as a rule, per year) - to own capital at the beginning of the period, equal capital is added to the end of the period and divide on 2. The net profit of the organization is taken according to "Profit and loss statement", equity capital - according to the liability of the balance.
Profitability of own capital \u003d net profit * (365 / Number of days in the period) / ((Own capital at the beginning of the period + equity capital at the end of the period) / 2)
A special approach to the calculation of the profitability of equity is the use of the DUPON formula.
The formula of Duppon splits the indicator into three components, or factor that allows you to deeper the result obtained:
Profitability of equity (DUPONOM formula) \u003d (net profit / revenue) * (revenue / assets) * (assets / own capital) \u003d net profit profit * Asset turnover * Financial leverage.
Normal value
According to averaged statistical data, the profitability of equity capital is approximately 10-12% (in the United States and the United Kingdom). For inflationary economies, such as Russian, the indicator should be higher. The main comparative criterion for analyzing the profitability of equity is the percentage of alternative yield, which the owner could receive, investing his money in another business.
Source: "audit-it.ru"
ROE equity profitability coefficient
Profitability of own capital (ROE, RETURN ON EQUUTY) is a financial indicator that expresses income to share capital. Close to return on investment ROI. The indicator shows the ratio of net profit for the period to the equity capital of the enterprise:
ROE \u003d PE / SK
where PE is net profit;
SC - own capital.
In net profit, dividends on ordinary shares are not taken into account, and preferred shares are not taken into account in their own capital.
Benefits
The ROE coefficient is one of the most important indicators for investors, top managers, owners of the enterprise, as it shows the effectiveness of nested their own investments (with the exception of borrowed funds).
disadvantages
Analysts are questioned by the reliability of the ROE indicator, believing that the profitability coefficient of own capital gives an overestimated assessment of the value of the company. There are 5 factors making ROE incomplete reliable:
- High project duration - the longer the period of analysis, the higher the ROE.
- Small share of aggregate balance sheet investments. The smaller the proportion, the higher the ROE.
- Uneven depreciation. What is non-evenly in the reporting period, depreciation, the higher the ROE.
- Slow return on investment. The slower the project pays off, the higher the ROE.
- Growth rates and investment rates. The younger company, the faster the growth of the balance, the lower ROE.
The calculation of the ROE coefficient is complicated by the fact that if we analyze the company with a high share of attracted capital in the balance sheet, then the calculation of ROE will not be transparent. With a negative indicator of the cost of net assets, the calculation of ROE and its subsequent analysis is ineffective.
Regulatory value
ROE ROE for developed countries is 10-12%. For developing countries with a high inflation rate - more than more. On average, 20%. Roughly speaking, the profitability of own capital is the bet that an enterprise attracts investment.
Analysis of the profitability coefficient of equity on the company's divisions (in areas in business) can clearly show the effectiveness of investing funds at a particular business direction, on the manufacture of a particular product, services. Also for the investor comparing ROE in two companies in which it is of interest, can show the most effective in terms of return.
When evaluating the ROE regulatory value, it is worth considering the cost of substitution. If securities are currently available with low indicator Risk, bringing 16% per annum, and the main direction of business gives ROE 9%, then the goal of ROE should be set above, or revise the business as a whole.
Source: "finance-m.info"
ROE coefficient calculation options
The profitability ratio of equity (RETURN ON Equity, ROE) is the ratio of the company's net profit to the average annual value of the share capital.
The profitability of own capital characterizes the profitability of the business for its owners, calculated after the deduction of interest on the loan (that is, net profit, in contrast to such indicators as ROA or RIC, is not adjusted for the amount of interest on the loan).
Formula of calculation:
There are some other options for calculating this coefficient. In particular, it can be used non-net profit, but profit before tax. In addition, sometimes instead of ROE uses the profitability of ordinary share capital (RETURN ON COMMON EQUITY, ROCE), in this case the formula of the indicator is as follows:
In all cases, when calculating this coefficient, it is assumed to use data from annual income and loss reports. If a quarterly or other reporting is used in the calculation, the coefficient must be multiplied by the number of reporting periods in the year.
Source: "CFIN.RU"
Equity profitability indicators
Profitability of equity (English ROE, i.e. Return on Equity,) is an indicator of net profit in comparison with the own capital of the organization. This is the most important financial performance indicator for any investor, the owner of the business showing how effectively the invested capital was used.
In contrast to the similar indicator of the "profitability of assets", this indicator characterizes the efficiency of the use of not the entire capital (or assets) of the organization, but only the part of its part that belongs to the owners of the enterprise.
Profitability of equity - one of the most important indicators of business performance. Any investor before investigating your finances in the enterprise analyzes this parameter. It shows how correctly assets belonging to owners and investors are used.
The profitability coefficient of equity reflects the amount of net profit ratio to its own funds of the company. It is clear that this calculation makes sense when the organization has positive assets that are not burdened by borrowed restrictions.
According to averaged statistical data, the profitability of equity in the United States and the United Kingdom is about 10-12%. For inflationary economies, such as Russian, the indicator should be higher. The main comparative criterion for analyzing the profitability of equity is the percentage of alternative yield, which the owner could receive, investing his money in another business.
For example, if a bank deposit can bring 10% per annum, and business brings only 5%, then the question of the feasibility of further conducting such a business.
According to the International Rating Agency S & P, the capital profitability coefficient of Russian enterprises amounted to 12% in 2010, the forecast for 2011 was 15%, for 2012 - 17%. Domestic economists believed that 20% is normal for profitability of equity.The higher the profitability of equity, the better. However, as can be seen from the formula of the DuPon, the high value of the indicator may turn out due to the too high financial lever, i.e. The large share of borrowed capital and a small share of their own, which negatively affects the financial sustainability of the organization. This reflects the main law of business - more profit, more risk.
The calculation of the profitability indicator of equity capital makes sense only if the organization has its own capital (i.e. positive net assets). Otherwise, the calculation gives a negative value that is affordable for analysis.
The profitability of equity is influenced by the following indicators:
- efficiency of operating activity (net profit from implementation);
- return of all assets of the organization;
- the ratio of own and borrowed funds.
How to estimate the return of business using the profitability coefficient
To do this, it is worth comparing it with indicators of alternative profitability. How much will the businessman get if to put his money into another matter? For example, he will assign funds to a bank deposit that will bring 10% per annum. And the profitability coefficient of the existing enterprise is only 5%. It is clear that it is inappropriate to develop such a company.
Compare the indicator with the standards historically prevailing in the region. Thus, the average profitability of companies in England and the United States is 10-12%. In countries with a stable economy, a coefficient is desirable within 12-15%. For Russia - 20%. In each particular state, many factors affect the values \u200b\u200bof the indicator (inflation, industry, macroeconomic risks, etc.).
High profitability does not always mean a high financial result. The higher the coefficient, the better. But only when a large share of investments make up their own funds of the enterprise. If borrowed, the solvency of the organization is under threat.
Thus, a huge debt load is dangerous for the financial stability of the company. It is useful to calculate the profitability of equity capital in the event that the company has this very capital. The predominance of borrowed funds in the calculation gives a negative indicator, practically not suitable for analyzing the return of business. Although it is categorically refer to the profitability ratio. Its use in the analysis has some limitations.
The actual income of the owner or investor depends not on assets, but from operating efficiency (sales).
On the basis of one indicator of the return on its own investment, assess the productivity of the company is difficult. Most companies have a significant amount of borrowed funds. The same banks exist only on borrowed funds (attracted deposits). And their net assets serve only the guarantor of financial stability. Whatever it was, but the profitability coefficient illustrates the company's revenues earned for investors and owners.
Formula of equity profitability
The profitability of the company's capital shows the amount of profits that the company will receive a unit of cost of own funds. For a potential investor, the value of this indicator is determining:
- The profitability coefficient gives an idea of \u200b\u200bhow well-used investment was used.
- Owners invest their funds, forming the authorized capital of the enterprise. In return, they get the right to a percentage of profits.
- Profitability of own funds reflects the magnitude of the profit, which the investor will receive from each ruble federated.
Calculate the profitability coefficient in different ways. The choice of formula depends on the tasks of the calculation. The calculation of the profitability of equity equity on balance is the ratio of net profit for the year to their own means of the enterprise for the same period. The data is taken from the "Profit and Loss Statement" and "Balance". If you need to find a percentage coefficient, the result is multiplied by 100.
Formula of net profitability of equity capital:
RSK \u003d PE / SK (Wed) * 100,
where RSK is the profitability of equity capital,
PE - Net profit for the estimated period,
SC (Wed) - average investment size for the same estimated period.
An example of calculating the formula. The company "A" has its 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%.
Investor can compare several enterprises to decide where it is more profitable to invest.
Example. The company "A" and "B" the value of equal capital is the same, 100 million rubles. Net profit of the company "A" - 400 million, and enterprises "B" - 650 million. Substitute data in the formula. We obtain that the profitability coefficient of the company "A" - 25%, "B" - 15%.
The yield 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 have entered the business with the same capital investment. But it worked better than the firm "B".
Formula of financial profitability of equity
To obtain more accurate data, it makes sense to divide the period to two: calculate revenues at the beginning and at the end of a certain period of time.
The calculation is:
RSK \u003d PE * 365 (days in interest in interest) / ((SCGG + SKKG) / 2),
where SCNG is equity at the beginning of the year;
SKKG is the value of own funds at the end of the reporting year.
If the indicator needs to be expressed as a percentage, the result, respectively, is multiplied by 100.
What figures are taken from accounting forms
To count the net profit (from Form No. 2, the "Profit and Loss Report"; lines and their name numbers are specified):
- 2110 "Revenue";
- 2320 "interest to receipt";
- 2310 "Revenues from participation in other organizations";
- 2340 "Other revenues".
To count the magnitude of equity (from the form N1, "Accounting Balance"):
- 1300 "Total to section" Capital and reserves "" (data at the beginning of the period plus data at the end of the period);
- 1530 "Incomes of future periods" (data on the beginning plus data at the end of the reporting period).
Formula for calculating the regulatory level of profitability
How to understand that the business makes sense to invest? The profitability of equity shows the regulatory value. One of the ways is to compare profitability with other options for advancing money (investment in the shares of other firms, buying bonds, etc.). The regulatory level of profitability is the interest on deposits in banks. This is a minimum, some kind of business definition limit.
Formula for calculating the minimum profitability coefficient:
RSK (H) \u003d STD * (1 - SNP),
where RSK (H) is a regulatory level of profitability of equity (relative value);
STD - the deposit rate (the average for the reporting year);
SNP - income tax rate (for the reporting period).
If, as a result of the calculations, the rate of return of nested own financial resources was less than RCK (N) or received a negative value, then investors are unprofitable to invest in this company. The final decision is made after the analysis of returns for several recent years.
DuPon formula for calculating the profitability of equity
To calculate the profitability coefficient of equity, the formula of Dupon is often used. It breaks the coefficient to three parts, the analysis of which makes it possible to better understand that more influences the final coefficient. In other words, this is a three-factor analysis of the ROE coefficient. The formula of Dupont has the following form:
The profitability coefficient of equity (Formula Dupon) \u003d (net profit / revenue) * (revenue / assets) * (assets / own capital)
The formula Dupont was first used in financial analysis in the 20s of the last century. It was developed by the American Dupont Chemical Corporation. The profitability of equity (ROE) according to the formula of DuPon is divided into 3 components:
- operating efficiency (sales profitability),
- efficiency of assets use (assets),
- credit shoulder (financial leverage).
ROE (according to Dupon formula) \u003d sales profitability * assets turnover * credit shoulder
In fact, if everything is reduced, then the formula described above, but such a three-factor separation of the components allows you to better determine the relationship between them.
Profitability ratio of equity
The profitability ratio of own capital is one of the most important coefficients used by investors and business owners, which shows how embedded (invested) money in the enterprise was effectively used.
The difference in profitability of equity (ROE) from the profitability of assets (ROA) is that ROE shows the effectiveness of not all assets (as ROA), but only those 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 investments more profitable. If the profitability of equity is less than zero, that is, the 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 of funds in the shares of other enterprises, bonds and, as a last resort, to the bank. It is important to note that too great importance The indicator can negatively affect the financial stability of the enterprise. Do not forget the main law of investment and business: more profitability is more risk.
ROE equity profitability indicator (Return on Equity) is one of the most important financial indicators for investors. Unlike the rating indicator of assets (), ROE characterizes the efficiency of using not the entire capital of the company, but only the part of its part that belongs to its shareholders. It is expressed as a percentage and calculated as:
- ROE \u003d Net profit / share capital cost x 100
- ROE \u003d NET INCOME / Shareholder's Equity x 100
The amount of net profit is taken for the fiscal year, excluding dividends paid on ordinary shares (taken into account when calculating the ROCE coefficient), but taking into account dividends paid on privileged shares (if available). Share capital is taken without taking into account preferred shares.
ROE is a bet that shareholders are working in the company. So, if ROE \u003d 20%, this means that each dollar invested by shareholders company generated $ 0.20 net profit.
Comparison of profitability of equity with an indicator of profitability of assets (ROA) gives an idea of \u200b\u200ba financial lever - financing due to borrowed funds
For ordinary shares, an indicator of profitability of ordinary share capital is used (RETURN ON COMMON EQUITY, ROCE). It is expressed as a percentage and calculated as:
- ROCE \u003d Net profit - privileged dividends / share capital cost - preferred shares x 100
- ROCE \u003d NET INCOME - Preferred Dividends / Shareholder's Equity - Preferred Stocks X 100
ROE should correlate with ROE similar companies, as well as with an alternative investment options available on the market. If the company's ROE is stably lower than market rates of profitability, it is more expedient to eliminate the business and invest money in market assets.
When ROE growth should also grow the P / B multiplier. Low Roe and high P / B can talk about the revaluation of shares. High ROE and low P / B - that the market underestimates the potential of the company.
It is also important to take into account that the company can improve ROE coefficient, redeeming its own stocks from the market, thereby reducing their number in circulation and increasing the profitability of equity. As a result, this can create an erroneous idea of \u200b\u200bthe Emitted Business Efficiency.
As for the regulatory value of ROE, in the long run, return to capital should not be lower than low-risk investments in financial instruments. Because if the profitability of business capital is below deposit rates in large banks or on bonds, the business ceases to be beneficial for its owners.
- For example, if it is expected that in the next 3 years, deposit rates will be in the range of 8-10%, then any business that will bring 10-12% to capital is lowly aspectative, as it is necessary to take into account that business risks are much higher, What attachments in state bonds or deposit.
Thus, the promotality of the business is assessed taking into account the rates on low-risk investments (bonds or deposits in large banks) and the risk premium (corporate, market, economic, political, etc.).
Traditionally, American and European corporations are shown the highest profitability, and the lowest, independent of the economic cycle, demonstrate Japanese companies.