How To Calculate The Rate Of Return

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How To Calculate The Rate Of Return
How To Calculate The Rate Of Return
Video: How To Calculate The Rate Of Return
Video: Math in Daily Life : How to Calculate Rate of Return 2023, February
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Profitability or profitability is a relative indicator of economic efficiency, which shows the degree of expediency of using monetary, material, labor, natural resources. This indicator, as a rule, is calculated when analyzing the financial condition of the enterprise and directly affects the investment attractiveness.

How to calculate the rate of return
How to calculate the rate of return

Instructions

Step 1

Calculate the rate of return as the ratio of the company's profit to its assets, available resources. You can also express the indicator in the profit from a certain product per unit of funds invested in its receipt or in the profit that any received monetary unit brings with it. For convenience and clarity, use a percentage.

Step 2

Determine your sales profitability. This indicator expresses the quality and correctness of the pricing policy of a company or an enterprise, and also shows the company's ability to control its own costs.

Calculate the return on sales by dividing the company's net profit by the revenue. The rate of return, which shows the part of the profit in each earned monetary unit, is usually calculated as the ratio of net profit after tax for a certain period of time to the volume of sales expressed in money for the same period of time.

Step 3

Different approaches to competition and the product lines produced or sold create large discrepancies in the profitability of sales of different companies. It should be noted that even if the two companies have the same revenue, cost, and pre-tax earnings, the profitability of sales can vary greatly due to the effect of the number of interest payments on the amount of net profit.

Step 4

When analyzing activities, you need to be able to calculate other indicators of the company's profitability. For example, calculate the return on assets as the ratio of operating income to the average amount of total assets for a certain period. The result of the calculations shows the ability of the company's assets to make a profit.

Step 5

Return on equity is the ratio of net income from capital investments to the average amount of your capital for a certain period.

Return on invested capital - the ratio of net operating income to the average for a certain period of its own and borrowed capital.

Product profitability is the ratio of the net profit from the product to its total cost.

Profitability of fixed assets - the ratio of net profit to the number of fixed assets.

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