The profit and profitability analysis: basic tools and techniques.

The Effect of the activity of any enterprise is characterized by the resulting profit or loss. Profit obviously, the rate of absolute and its relative value is determined by profitability. To do any conclusions only on corny calculated indicators is difficult, so it is advisable to carry out the analysis of profit and profitability of the company.

There are many methods of analysis, but we consider just a few. The first of these is the horizontal analysis of profit and profitability. It consists in studying the changes of these indicators in the framework of one enterprise over time. In other words, using indicators over several periods, we can determine their absolute and relative changes, which will allow to identify the main trends in both profits and profitability. As for profits, the horizontal analysis can be carried out not just one indicator, and the statement of profit and loss as a whole. In this case, it is possible to estimate not only how they have changed the profit, but also the factors that affect it.

In addition, it should address the fact that the above mentioned report may be subjected to vertical analysis, i.e. the analysis of the structure. It will be possible to trace the change of share in revenue and profit, and actual cost, and taxes, and other factors that affect the formation of profit.

Speaking of factors. Analysis of profit and profitability of an organization called the factor, is an extremely popular method, as it allows to identify, for example, the main problems that cause lower profits. This type of analysis is convenient to carry out profits, based also on the statement of profit and loss. The fact that it reflects the process of profit formation and makes it easy to build a mathematical model, which can be simple enough to perform. In this case, more details should explore the impact on the profit of revenue as it in turn, also depends on two factors – the prices and volumes of sales. Their effect should be separately disclosed.

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Factor analysis in respect of profitability traditionally associate with the DuPont formula, which by the method of absolute differences reveal the influence of factors on the profitability of the assets (property) and capital. Before applying this technique to convert several useful mathematical models of the specified types of profitability in order to identify the factors which impact will be assessed. Simple transformations allow us to conclude that the return on assets is based on their turnover and profitability of sales and the efficiency of use of own capital in addition to experience the effects of the leverage ratio.

This type of analysis can be subjected to any earnings and profitability, nothing will prevent you, for example, to do the necessary calculations and carry out factor analysis of profitability of staff. Just in case you will have to convert the mathematical model of yourself to take into account the factors and also to dispense with the use of predetermined formulas. Of course, this kind of analysis will also require information for some periods, at least two.

Describes techniques traditionally consist of the analysis of profit and profitability of enterprises of the real economy. However, with certain transformations, you will be able to analyze the profitability of the Bank or other financial institution. In this case the difference is not so much in methods of analysis, as they are still quite common, namely the structure of those indicators that you will analyze.