The return on equity reflects. How the return on equity ratio is calculated

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 effectively 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% - 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 can be obtained due to 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 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, 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 allocate funds for 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 specific state, the values ​​of the indicator are influenced by many factors (inflation, industrial development, macroeconomic risks, etc.).

High profitability does not always mean high financial results. 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 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.

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,

SK (Wed.) - the average size 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 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 that in more affects the final score. 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 assess own investments into it. The higher the value of the coefficient, the more profitable the investment. If the return on equity less than zero, that is, an occasion 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.

Maxim Shilin

Especially for Information Agency "Financial Lawyer"

Equity capital characterizes the return on shareholders' investments in terms of the profit received by the company. This coefficient can be abbreviated ROE (return of investment) and have a different name to a shareholder. The calculation is made according to the formula:

Net income includes dividends paid on preferred shares, but excludes those paid on common shares. securities. The equity value does not include preferred shares.

How useful is the return on equity ratio?

It makes it possible to judge how effectively it is being used. It is important to consider: the ratio demonstrates the effectiveness of only that part of the capital that belongs to the owners of the company. ROE is not considered the most reliable indicator financial condition organizations - it is commonly believed that it overestimates the value of the firm.

There are five main ways of interpreting meaning:

1. Cushioning. A high ROE makes it possible to judge uneven depreciation.

2. Growth rate. Companies that grow rapidly have a low ROE.

3. Project duration. Long-term projects are characterized by a high value of the coefficient.

4. Time gap. The longer the time period between investment spending and the return on them, the higher the ROE.

Return on total capital is calculated using the following formula:

This indicator is the most interesting for investors.

To calculate the return on equity, I use the formula:

This ratio shows the profit from each capital invested by the owners monetary unit. It is a basic coefficient that characterizes the effectiveness of investments in any activity.

2. Profitability of sales

If it is necessary to analyze the profitability of sales based on sales proceeds and profit indicators, profitability is calculated for individual types of a product or for all its types as a whole.

gross margin of the product sold;

operating profitability of the product sold;

net profit margin on product sold.

The calculation of the gross margin of the product sold is carried out as follows:

The gross profit indicator reflects the efficiency of production activities and the effectiveness of the pricing policy of the enterprise.

The following formula is used to calculate the operating profitability of a product sold:

Operating profit is the profit that remains after deducting administrative expenses, distribution costs and other operating expenses from gross profit.

Net profit margin of product sold:

If the operating margin remains unchanged over any period of time, while the net profit ratio decreases, this may indicate an increase in expenses and losses from participation in the capital of other enterprises, or an increase in the amount of tax payments. This ratio demonstrates the full impact of enterprise financing and capital structure on its profitability.

3. Profitability of production

gross margin of production.

net profitability of production;

These indicators reflect the profit of the enterprise from each ruble spent by it on the production of the product.

To calculate the gross margin of production, the following formula is used:

Shows how many rubles of gross profit fall on the ruble of costs that form the cost of the product sold.

Net profitability of production:

Reflects how many rubles of net profit fall on the ruble of the product sold.

In relation to all the above indicators, positive dynamics is desirable.

In the process of analyzing the profitability of an enterprise, one should study the dynamics of all the considered indicators, as well as compare them with the values ​​of similar indicators of competitors and the industry as a whole.

52. Depreciation policy of the enterprise

The depreciation policy of an enterprise is a strategic and tactical set of interrelated measures to manage the reproduction of fixed capital in order to timely update the material and technical base of production on a new technological basis.

The depreciation policy of an enterprise is determined from the economic strategy, the composition of fixed assets, methods for estimating the cost of depreciating objects, the inflation rate, etc. The depreciable property of an enterprise is most types of fixed assets (with the exception of land), as well as intangible assets. Fixed assets are accepted on the balance sheet of the enterprise at their original cost, which also includes the cost of transportation and installation work, after which depreciation is subtracted from them, i.e. resulting in residual value. Depreciation deductions (depreciation fund) are the main component of financial support for the reproduction of fixed assets.

In the process of forming the depreciation policy of the enterprise, the following factors are taken into account:

a) the volume of used fixed assets and intangible assets subject to depreciation;

b) methods for estimating the cost of used fixed assets and intangible assets subject to depreciation;

c) the actual period of the expected use of depreciable assets at the enterprise;

d) methods of depreciation of fixed assets and intangible assets permitted by law;

e) the composition and structure of the fixed assets used;

f) the rate of inflation in the country;

g) investment activity of the enterprise in the forthcoming period.

When choosing depreciation methods, proceed from the current legislative framework in this area, the expected period of use of depreciation assets and the tasks of forming the investment resources of the enterprise in the context of individual sources. The decision to apply the method of straight-line (linear) or accelerated depreciation of fixed assets is taken by the enterprise independently.

The funds of the depreciation fund, which is formed from accumulated depreciation deductions, are targeted and should be used for the following purposes:

a) overhaul of fixed assets;

b) the implementation of reconstruction, modernization, technical re-equipment and other types of improvement of fixed assets;

c) acquisition of new types of intangible assets (primarily related to innovation activities)

53. Settlement and cash services for enterprises in banks

54. The relationship of financial indicators. dupont formula

Financial indicators reflect the size, composite dynamics and the relationship of social phenomena and processes occurring in the field of finance, in their quantitative and qualitative state. The diversity of financial relations determines the diversity of financial indicators.

Factor analysis is the process of studying the influence of individual factors (reasons) on the performance indicator using deterministic and statistical research methods. In this case, factor analysis can be both direct (analysis itself) and reverse (synthesis). With the direct method of analysis, the performance indicator is divided into its component parts, and with the reverse method, the individual elements are combined into a common performance indicator. To achieve higher accuracy of the results, it is necessary to constantly adjust the set of indicators and the values ​​of the weighting coefficients for each indicator, taking into account the type of economic activity and other listed conditions.

Method financial ratios- Calculation of the ratios of financial statements data and determination of the relationship of indicators. When conducting analytical work, the following factors should be taken into account: 1) the effectiveness of the applied planning methods; 2) reliability of financial statements; 3) the use of various accounting methods (accounting policies); 4) the level of diversification of the activities of other enterprises; 5) the static nature of the applied coefficients.

In the practice of Western corporations (USA, Canada, Great Britain), the following three coefficients are most widely used: ROA, ROE, ROIC.

The DuPont model allows you to determine what factors caused the change in profitability, i.e. perform a factor analysis of profitability.

The DuPont method (DuPont formula or DuPont equation) is usually understood as an algorithm financial analysis profitability of the company's assets, according to which the profitability ratio of assets used is the product of the profitability ratio of product sales and the turnover ratio of assets used.

Currently, there are three main DuPont formulas in the educational and methodological literature, which depend on the number of factors used in the analysis of ROE (return on equity).

The first model has a rather simple form, with the help of it it is easy to find the value of the return on capital, the formula looks like this:

where NP is net profit, SK is the share capital of the enterprise.

It should be noted that this formula has its drawbacks, the main of which is the impossibility of determining the factors that influenced the return on equity.

The following DuPont model is more informative and looks like:

where ROA is the return on assets ratio, defined as the ratio of the company's net profit, excluding interest on loans, to its total assets; DFL - financial leverage ratio.

If we expand this formula by supplementing it with an implementation indicator, then the model takes the form:

ROE \u003d (PE / Or) * (Or / A) * (A / Sk)

where Or - the sale of goods, works and services, excluding excise taxes and VAT; A is the total assets of the company.

The DuPont equation, which already consists of five factors, most fully takes into account the factors influencing the return on equity:

ROE = (NP/EBT)*(EBT/EBIT)*(EBIT/Or)*(Or/A)*(A/Sk)

Two indicators are additionally introduced into this formula: EBT - profit before taxes; EBIT is earnings before interest and taxes.

Using financial leverage (or leverage), you can transform the specified equation, in this case, the Dupont formula will take the form:

ROE = (NV/EBT)*(EBT/EBIT)*(EBIT/Or)*(Or/A)*DFL

NP/EBT – tax burden;

EBT / EBIT - the burden of interest;

EBIT/Or - operating margin (ROS);

Op/A - asset turnover (resource return);

DFL is the effect of financial leverage.

« Dmitry, potential financial losses from a negative change in reputation are very difficult to translate into the language of numbers. There is big chance slip into subjectivity.»

« We will be grateful if you provide detailed research on this topic.»

I am not a public company raising other people's money. I live on mine. Therefore, I do not need to advertise my research and observations. I post something in blogs on Komon. And yes, the details don't make sense. It is enough to see the big picture from your own charts and statements. You are constantly surprisingly asserting that the RF FR is underestimated in terms of P / E. So what. He's only getting more and more underrated. This is already obvious proof that no P/E market cares. Next, we look at your HIT PARADE. In the first places: Gazprom, VTB, Transneft. VTB has a special history. It is hard to imagine a more inefficient investment management. Gazprom and Transneft already have P \ E probably 1. And what. The market doesn't care at all. Because everyone clearly understands that no one here will ever receive any money except on speculative trading operations. There will be one investment in an infinitely happy future. What are your grades worth? construction companies. If the exchange puppeteers didn’t support the quotes there and the shares weren’t pledged to the banks, they would have cost around 0 for a long time. What other research do you need to make it clear about the discrepancy between yours and the exchange realities? If the price on the market does not correspond to your ideas about it for a long time, then the market is always right. And trying to imagine yourself smarter than him is ignoring practice as a criterion of truth and the path to ruin.

« And here is Arsagera's basic mistake demonstrating the non-market nature of her views. It is better to call not net, but free cash flow. In the market there is no other base value for measurements other than money, and any non-monetary paper income is not real income, but is a sham. Any capital investment in almost any enterprise reduces its value by the amount of these investments. Because you will not sell it to anyone in reality in the future. The price on the exchange is pure speculation on the topic of future FREE cash flows and nothing more. Failure to understand this has ruined and will ruin a lot of newcomers to the market and companies that ignore this obvious fact.»

Your position on investments is very clear to us, you have expressed it more than once. Now in your words there is one generality and no specifics. I will give an example: "Any capital investments in almost any enterprise" - please, bring concrete examples and calculations, prove that "ANY capital investment" and in "ANY enterprise" should not be so easily thrown into absolute statements.

"The price on the stock exchange is pure speculation on the subject of future FREE cash flows and nothing more", we are sure that you sincerely believe in this, and we are not trying to convince you, we have no such task. We advise you to take into account other opinions to broaden your horizons - http://arsagera.ru/kuda_i_kak_investirovat/klyuchevye_metodiki_upravleniya_kapitalom/vzaimosvyaz_ekonomiki_kompanij_i_stoimosti_ih_akcij/

"Misunderstanding of this has ruined and will ruin a lot of newcomers to the market and companies that ignore this obvious fact." - newcomers are ruined by speculation, if necessary, we can provide you with a lot of evidence of this. In addition, as already mentioned, your "obvious fact" is not only not "obvious", it is also not a "fact".

Profitability indicators

• Product profitability- the ratio of (net) profit to the total cost
• Profitability of fixed assets- the ratio of (net) profit to the value of fixed assets
• Profitability of sales(Margin on sales, Return on sales) - the ratio of (net) profit to revenue.
• Basic return on assets(Basic earning power) - the ratio of profit before taxes and interest receivable to the total value of assets
• Return on assets (ROA)- the ratio of operating profit to the average size of total assets for the period
• Return on equity (ROE):
  • the ratio of net profit to the average equity for the period;
  • the ratio of earnings per common share to the company's book value per share.
• Profitability invested capital(ROIC)- the ratio of net operating profit to the average equity and debt capital for the period
• Return on capital employed (ROCE)
• Return on total assets (ROTA)
• Return on business assets (ROBA)
• Profitability net assets(RONA)
• Margin Profitability(Profitability of the margin) - the ratio of the cost of production to its selling price
• etc. (see profitability ratios in financial ratios)

Profitability of sales

Return on sales(English) profit margin) - coefficient profitability, which shows the share of profit in each earned ruble. Usually calculated as the ratio of net profit (or profit before tax) for a certain period to expressed in cash sales volume for the same period.

Return on Sales = Net Profit / Revenue

Return on sales is an indicator of a company's pricing policy and its ability to control costs. Differences in competitive strategies and product lines cause significant variation in return on sales values ​​in different companies. It is often used to evaluate the operating efficiency of companies. However, it should be borne in mind that with equal values ​​of revenue, operating costs and profit before tax, the two different firms return on sales can vary greatly due to the impact of interest payments on net profit.

Return on assets

Return on assets(English) return on assets, ROA net profit received for the period, by the total value of the organization's assets for the period. One of the financial ratios, is included in the group of profitability ratios. Shows the ability of the company's assets to generate profit.

Return on equity

Return on equity(English) return on equity, ROE) - relative indicator performance, quotient from dividing the net profit received for the period by the organization's equity. One of the financial ratios, is included in the group of profitability ratios. Shows the return on shareholder investment in terms of accounting earnings.

Return on Equity = Net Profit/Average Equity for the Period

Notes

Sources

• Brigham Y., Erhardt M. Analysis financial reporting // Financial management= financial management. theory and practice. - 10th ed./Trans. from English. under. ed. Ph.D. E. A. Dorofeeva .. - St. Petersburg: Peter, 2007. - S. 131. - 960 p. - ISBN 5-94723-537-4

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See what "Return on Equity" is in other dictionaries:

Net profit of the company, expressed as a percentage of equity. In English: Return on equity English synonyms: ROE See also: Profitability ratios Own capital Financial Dictionary Finam ... Financial vocabulary

The ratio of a company's net income to equity, expressed as a percentage. Dictionary of business terms. Akademik.ru. 2001 ... Glossary of business terms

Net return on equity (ROE)- net profitability of equity (return of equity, ROE) ratio of net profit to the average cost of equity over the period ... Source: Guidelines on evaluating the effectiveness of investment projects (approved ... ... Official terminology

RETURN ON EQUITY OF THE COMPANY- net profit of the company as a percentage of equity capital ... Big Economic Dictionary

The ratio of the company's net profit to the average equity. In English: Net profitability of equity See also: Profitability ratios Own capital Finam Financial Dictionary ... Financial vocabulary

net return on equity- The ratio of the net profit of the enterprise to the average value of equity capital. Topics economics EN net profitability of equity … Technical Translator's Handbook

RATIO of earnings before interest and taxes, multiplied by 1 minus the tax rate, TO the amount of debt and equity. The return on invested capital characterizes the profitability of the company when investing at the expense of ... ... Financial vocabulary

Coefficient characterizing the profitability per unit of invested capital. It is calculated as the ratio of net profit to the average equity capital. Dictionary of business terms. Akademik.ru. 2001 ... Glossary of business terms

Profitability (German rentabel profitable, profitable), relative indicator economic efficiency. Profitability comprehensively reflects the degree of efficiency in the use of material, labor and monetary resources, as well as natural ... ... Wikipedia

- (German rentabel profitable, useful, profitable), a relative indicator of economic efficiency. Profitability comprehensively reflects the degree of efficiency in the use of material, labor and monetary resources, as well as ... ... Wikipedia

Books

• Analysis of the effectiveness and risks of entrepreneurial activity. Methodological aspects. Monograph, Savitskaya G.V. The book considers the essence of efficiency entrepreneurial activity, a structured system of indicators has been developed to identify its level and a methodology for calculating them. Made…