Return On Equity

Return is a relative. It characterizes the level of profitability of the enterprise. This indicator reflects the efficiency of the business as a whole, shows the profitability of certain activities. The profitability indicators used in the financial analysis, because they are able more fully than profit, to characterize and reflect the real results of business activity. Their value shows the ratio of the activity with resources consumed.

Financial analysis provides a true picture that reflects the performance of the company, its solvency, profitability, and growth prospects. This analysis allow us to draw on specific figures when making strategic decisions for future periods.

Profitability are very rich diversity. They are all characterized by the efficiency of the enterprise from different perspectives. These indicators can be grouped into three major groups in certain areas. They include product profitability, sales margin and return on equity.

Return on equity Or return of capital  reflects the attitude of the book profit or partial profit to the average cost of all invested in enterprise capital or its individual parts. The capital may be private, equity, debt, permanent, negotiable, basic, operational, etc.

Return of capital Bank or company is a financial index that measures the profitability in the context of present assets with which to make a profit. The analysis of these indicators take into account all the assets at the disposal of the enterprise. Total return on equity is calculated as follows.

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To calculate the return on capital need to determine the sales volume for a certain period. Information can be viewed as a shipment, and payment received for products shipped. The company in this matter emanate from the convenience of the method of determining the volume of sales.

Then you need to determine the cost of goods sold. This is one of the methods corresponding to the definition of sales. In addition, it is necessary to determine the operating expenses (fixed costs) over the same period. Calculate the amount of taxes that would be paid for the period.

After this is calculated the net profit. To do this, the amount of sales subtract cost of goods, operating expenses and taxes. All figures in the calculations you need to spend one unit of measure (e.g. thousands of rubles).

At this stage you can proceed to the definition of total assets. Total assets – is the sum of the total liabilities of the company and its equity. We can now calculate the return on equity. For this net profit is divided by total assets.

If the company in its activity operates with different financial indicators, the profitability of capital you can count in another way. To do this, the return on sales multiplied by turnover of total capital.

For the owners of the company the most important indicator is the return on equity. He is the main criterion of efficiency of use of their investments. This indicator is calculated as the ratio of net profit to equity on the balance sheet.

Analysis of profitability allows to reflect the financial condition of the company and to see its prospects for the future. Therefore, the analysis focuses on the quality indicators and their proper grouping in large groups.