Return on invested capital.

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The article will discuss the main indicators of enterprise profitability. 1 Profitability indicator share capital(ROCE)

is determined through the ratio of net profit minus dividends on preferred shares to the average annual share capital. Calculation formula: ROCE

= (net profit - dividends on preferred shares) / average annual share capital *100% The average annual value of share capital is calculated as the sum of its value at the beginning of the year and at the end of the year divided by 2. The ROCE (Return on Capital Employed) indicator is used as an indicator of the profitability that an enterprise generates on its invested capital. If the company does not have preferred shares

or is not obligated to pay dividends, then in this case the ROCE value is equivalent to the ROE value. 2 Return on invested capital (ROIC).

The indicator is calculated as the ratio of net operating profit less adjusted taxes (NOPLAT) to invested capital. Calculation formula: = ROICNOPLAT

/ invested capital *100%
Invested capital is capital that is invested in the main activities of the enterprise.
Invested capital = current assets + net fixed assets + net other assets
or another way to determine this indicator:.

Invested capital = equity + long-term liabilities 3 Return on total assets (ROTA).

The indicator is calculated as the ratio of operating profit to the assets of the enterprise. The indicator is used to increase revenue and reduce costs and non-production expenses. Calculation formula:

ROTA = EBIT / average assets of the enterprise * 100% ROTA very similar to ROA. The difference is that when determining ROATA, operating income is used, and not net as in ROA. One of significant shortcomings

The indicator lies in its noticeable deterioration when attracting borrowed capital; in addition, it does not take into account seasonal specifics and the type of activity. It is good to use as an “additional” one. 4 Profitability equity(ROE). The indicator is one of the important ones for evaluation enterprises. It determines the profit per ruble invested in the enterprise. Calculation formula:

ROE= net profit / equity * 100%

ROE can also be determined using the following formula:

ROE = ROA* leverage ratio

5 Return on enterprise assetsROA. The indicator determines the amount of net profit that a unit of enterprise assets brings. The indicator allows you to assess the quality of work of managers.

ROA= (net profit + interest payments)* (1 – tax rate) / enterprise assets * 100%

Net profit = revenue – enterprise costs.
Enterprise assets are the amount of property and cash owned by the enterprise.

6 Gross Profit Margin (GPM). Determines the share of gross profit in sales volume. Calculation formula:

GPM = G.P. / N.S.= Gross profit / total revenue

7 Operating profit margin (OPM). Share of operating profit in sales volume. Calculation formula:

O.P.M. = OP / N.S.= operating profit / total revenue

8 Net profit margin (NPM). Share of net profit in sales volume. Calculation formula:

NPM = NI / N.S.= net profit / total revenue

9 Profitability current assets(RCA). Calculation formula:

RCA = NI / C.A.

10 Profitability non-current assets(RFA). Calculation formula:

R.F.A. = NI / F.A.= net profit / working capital

Return on Capital Employed (ROCE) is...

Return on capital employed is a financial ratio that determines the profitability and efficiency of a company relative to the company's capital employed. The ROCE indicator is calculated using the formula:

The “capital employed” in the denominator is the sum of equity and debt: this can also be simplified to (total assets – current liabilities). Instead of using capital employed at a point in time to calculate ROCE, analysts and investors typically calculate ROCE based on the average capital employed. The average value can be calculated by finding the arithmetic average of two numbers: the value of capital employed at the opening of the period and the value of capital employed at the close of the period.

A high ROCE implies efficient use capital of the company. ROCE must be higher than the company's cost of capital (you can use weighted average cost capital -WACC), otherwise the fact of inefficient use of capital and, as a consequence, the lack of generation of additional value for shareholders will become obvious.

Investocks explains "Return On Capital Employed (ROCE)"

ROCE is a useful metric for comparing the profitability of companies based on capital employed. Imagine that there are two companies LLC TD “Russkoe Pole” and LLC TD “English Meadow”, which operate in the same industry sector. Russian Field has EBIT of $10 million on revenue of $100 million per year, while English Meadow has EBIT of $7.5 million on the same revenue. At first glance it may seem that the English Meadow is best investment compared to the Russian Field, since the English Meadow has a profitability of 7.5%, and the Russian Field is 5%. But before making a decision experienced investor check the capital involved in both companies. Let's assume that Russian Field has a total capital of $25 million and English Meadow has $50 million. In this case, Russian Field has an ROCE of 40% and English Meadow has an ROCE of 15%. This means that Russkoye Pole TD LLC is much more efficient in using its capital than English Meadow.

ROCE is especially useful when comparing the performance of companies in capital-intensive sectors, such as telecommunications. This is because, unlike return on equity, which only looks at profitability relative to equity, ROCE also takes into account debt and other liabilities . By applying ROCE, a more accurate conclusion can be drawn about financial results companies with significant debentures.

In some cases, additional adjustments are required to obtain a more accurate return on capital employed. Sometimes a company may have an unusually large amount of cash, but since these cash are not used to operate the business, they can be subtracted from capital employed to obtain a more accurate figure.

ROCE (return on capital employed) is used to analyze the investment attractiveness of a company and compare profitability among competitors. This indicator is also important for assessing the interest rate on loans that is feasible for the enterprise. And although it does not have standards, investors and banks prefer companies with a consistently growing ROCE year after year.

Availability of capital - necessary condition for the successful operation of any enterprise. When there's not enough own funds, resort to borrowed funds: bank loans, credits, loans allow the company to finance current activities, develop, expand and explore new markets.

Determination of capital employed

Capital employed (Capital)- is the sum of the company’s own funds used and those raised for long term basis resources (return period more than 1 year).

The formula for calculating the ZK is as follows:

ZK = Z + DZ + D + OS + PS, where:

• ZK - borrowed capital;
• DZ - accounts receivable;
• D - money capital;
• OS - fixed assets;
• PS - other means.

Own funds are formed from:

• Authorized capital.
• Targeted financing.
• Savings ( reserve funds, additional capital, retained earnings).

ZK are stored and used in different ways depending on the purposes and needs. Funds may be in the form of cash in the cash register, lying on bank accounts or be featured in the goods. They use LC for investment (they distinguish between initially invested, disinvested or reinvested).

Determination of ZK profitability

Profitability is relative indicator profitability of a particular source of capital. It talks about the efficiency of using the company's resources.

Return on Capital Employed (ROCE)- return on capital employed. The indicator characterizes the involvement of employed capital in commercial activities enterprises, the company's attractiveness for investment.

Note! ROCE is used to compare the profitability of companies operating in the same industry, their investment attractiveness, and their lending prospects.

Formula

ROCE is calculated using the formula:

• EBIT - balance sheet profit (profit before tax);
• ZK - total capital employed.

The resulting value can be multiplied by 100 - in this case, a percentage is obtained, which is more convenient for perception. Indicators of profit and capital must be taken as averages over the same period of time.

• EBIT NP - profit at the beginning of the period;
• EBIT KP - profit at the end of the period.

The average amount of capital involved is found similarly:

• ZK NP - capital employed at the beginning of the period;
• ZK KP - employed capital at the end of the period.

As a rule, the indicator is calculated for a year, but you can take smaller periods of time, for example, a quarter or a month. For analysis, you can compare the obtained value with similar periods in the past to track the dynamics.

Economic meaning of the coefficient

ROCE acts as a guideline for the feasibility of raising funds at a certain interest rate. The indicator is compared with interest on the loan. If the percentage is greater than profitability, then the company should not consider such an offer, because it can effectively use credit funds will not work. Overpaying will become oppression.

But if the rate is less than ROCE, then it makes sense to take out a loan, since the company will be able to apply borrowed funds with greater benefit.

When analyzing ROCE, data is used not only on own assets, but also on debt obligations, so it can be used to make a more accurate conclusion about the profitability of the company than by return on equity. This is especially important for high capital intensive businesses.

By comparing ROCE over time, one can draw conclusions about whether conditions for interest-bearing loans have become more favorable than last season, or whether it is worth holding off on lending for now. You can also assess whether it is wise to attract investment now.

Standards

There is no specific standard for ROCE. But one thing is clear: if the company plans to use the funds raised, it must maintain a profitability rate at a level above the average interest rate on loans. If ROCE is consistently higher bank interest, the company will always be able to profitably use borrowed capital. Otherwise, overpayment on the loan may affect financial stability company, since it will be necessary to service interest at the expense of core business.

Calculation example

Let's calculate the return on capital employed using the example of an enterprise for each quarter of 2016 and 2017. The calculation is presented in a table that can be downloaded in Excel.

The minimum ROCE value was observed in the first quarter of 2016 and amounted to 8.8%. This means that the maximum interest rate on the loan for effective debt servicing during this period was 8.8%. However, later this value increased to 19.8%.

In 2016, it was inappropriate to take out a loan at an interest rate of more than 13.4 (average ZK profitability). In 2017, the lending situation was more favorable: the maximum ROCE value was 32.8% (Q3 2017), and the average for the year was 20.4%. It would be possible to consider more proposals and find an investor easier.

However, the graph shows that the indicator is volatile and its value is not constant. This means that there are risks for the enterprise that the return on capital employed may decrease in the next period. But if you look at the data cumulatively over the years, there is an increase in profitability, that is, in 2017 the return on capital employed was higher than in 2016.

Conclusion

ROCE is an important indicator for assessing the investment attractiveness of a company. Its meaning will be of interest not only to business owners, but also credit institutions, as well as shareholders (upon joining joint stock companies) and potential investors. Stable growth of the indicator indicates the efficiency of capital allocation and the stable position of the enterprise in the market.

The return on invested capital ratio shows whether the funds invested in a project or business will bring profit. It is not considered as a single value: most often it is compared with the indicators of competitors, industry averages, and also evaluated over time. The basis for the calculation is information from forms No. 1 and No. 2: operating profit (form 2), equity capital (form 1) and long-term liabilities (form 1).

Before investing in a project, startup, business, or marketing campaign, it is important to evaluate the profitability or unprofitability of such an event. It is possible to calculate the NPV indicator, but there is not always enough information to evaluate it, and the algorithm for determining it is very complex. To quickly assess the feasibility financial investments It is best to choose the return on invested capital indicator.

Return on invested capital(ROIC, ROI, RIC - Return On Invested Capital) is a financial indicator that shows how many rubles of profit each investment made in a project will bring.

Reference! ROIC in economic literature and applied research often called "return on invested capital", "return on investment", "return on invested capital" or "rate of return", also Return On Investment, Return On Total Capital, ROTC.

Return on invested capital characterizes the return provided by the financial resources invested in the business. In this case, only those investments that were directed to the main activities of the company are taken into account.

Reference! Invested capital is the sum of equity and long-term liabilities that were used to finance the main activities of the company. If shareholders' funds are sent directly to production, then the RIC indicator is applicable to them.

The indicator allows you to evaluate not only the profitability of the invested project or business, but also the efficiency of using the investments in them financial resources.

Formula for calculating return on invested capital

ROIC is an indicator that is calculated as the ratio of the company's operating profit (Article 2200 F. No. 2) to the total invested funds. In this case, long-term liabilities (Article 1400 F. No. 1) and equity capital (Article 1300 F. No. 2) are taken for invested funds.

RIK = OP / DO + SK, where

RIC - return on invested capital;

OP - operating profit;

DO - long-term liabilities;

SK - equity capital.

Important point! Often in practice, operating profit is adjusted by the amount of income tax, multiplying it by the identity (1 - tax rate).

In some cases, instead of operating profit, net profit is used when calculating Return On Invested Capital. However, in this case, you can get an inaccurate result, which will depend not on the results of the main activity, but on interest payable and tax deductions.

Standard indicator value

Financial analysis does not offer an exact value for the optimal level of profitability of funds invested in core activities:

• firstly, it depends on the industry, operating characteristics and other factors;
• secondly, it should be assessed in dynamics or in comparison with other enterprises in the industry.

Important point! Most often, a high ROIC indicates effective management of invested resources. However, it can also be a consequence of the desire of managers to “squeeze” maximum profit from the business in short term, which has a negative impact on the company's value in long term.

If, according to the results of the calculation, the RIC turns out to be negative, then the project, startup, or business is unprofitable. A high positive value of the indicator in practice contributes to an increase in the value of the corporation's shares.

What are the disadvantages of the coefficient?

The basis for calculating Return on Invested Capital is the data financial statements - balance sheet(F. No. 1) and profit and loss statement (F. No. 2). This creates some difficulties in its analysis:

• it is impossible to determine how the profit was made: its basis can be regular effective activity or one-time random income;
• company directors can artificially influence the operating profit indicator and, thereby, unreasonably inflate the RIC;
• the indicator is influenced by inflation, exchange rates(for international companies), as well as internal accounting policy enterprises.

Important point! Analysis of an indicator for 1 year, as a rule, requires comparison with other enterprises in the same industry. If we consider it within one company, it is important to track its dynamics over a period of at least 3 years.

Examples of coefficient calculation

In order to analyze the profitability of capital invested in the main activity, in practice it is worth taking indicators for several years of operation of two companies from the same industry: the giants of vegetable oil production in Russia: Yug Rusi LLC and Bunge Limited (BG) LLC (trading brand "Oleina").

Conclusion! The dynamics of the RIC indicator for Yug Rusi LLC in the general trend is positive: every year the funds invested in the enterprise are used more and more efficiently. In 2016, the corporation modernized production, which led to a decrease in the ratio. In 2016, updated equipment increased production efficiency and profitability invested funds has increased.

Conclusion! Within Bunge Limited (BG) LLC, there has been an increase in the efficiency of using invested capital: the RIC indicator has increased by 5.8% over three years. This trend serves as a favorable signal for both the owners of the enterprise and potential third-party investors.

If we compare the ROIC indicator of two companies, we can come to the conclusion that Bunge Limited (BG) LLC uses invested capital more efficiently than its competitor Yug Rusi LLC (indicators in 2016 are 0.092 and 0.011, respectively ). In this light, the latter should reconsider the policy of using resources invested in business.

A detailed scheme for calculating the RIC coefficient based on the Excel spreadsheet editor is given in

Return on equity, like other profitability indicators, indicates the efficiency of a business. More precisely, about the return with which the owners’ money invested in the company’s capital works. To put it simply, profitability helps to understand how many kopecks of profit each ruble of its equity capital brings to a company.

Return on equity can give an idea to the investor or its specialists how successfully the company manages to maintain the return on capital at the proper level and thereby determine the degree of its attractiveness to investors.

The system of indicators has a similar indicator - return on assets ( see “Determining return on assets (balance sheet formula)” ). However, in contrast, return on equity allows us to judge precisely the work of the net equity capital of the enterprise. At the same time, the funds raised and spent on the acquisition of property may also interfere with the return on assets.

So how is profitability calculated?

How to find return on equity ratio

Profitability is always the ratio of profit to the object whose return needs to be assessed. In this case, we are looking at equity. This means that we will divide the profit into it.

In financial analysis, return on equity is usually denoted using the ROE coefficient (short for return on equity). We use this notation, and then the formula for calculating the indicator may look like this:

ROE = Pr / SK × 100,

Pr - net profit (the return on equity indicator is calculated only based on net profit).

SK - equity capital. To make the calculation more informative, take average SK. The easiest way to calculate it is to add the data at the beginning and end of the period and divide the result by 2.

Return on equity is a ratio that is relative in nature; it is usually expressed as a percentage.

Factor analysis of return on equity

Sometimes another formula is used for calculation - the so-called Dupont formula. It looks like this:

ROE = (Pr / Vyr) × (Vyr / Act) × (Act / SK),

where: ROE is the required profitability;

Pr - net profit;

Vyr - revenue;

Act - assets;

SK - equity capital.

That's what it is factor analysis profitability.

Return on equity - balance sheet formula

This indicator can be found not only by calculation, but from reporting documents. So, there is a simple answer to the question of how to find equity from the balance sheet.

To determine return on equity, information contained in the balance sheet lines (Form 1) and in the income statement (Form 2) is used.

The balance formula will look like this:

ROE = Form 2 Line 2400 / Form 1 Line 1300 × 100.

For more information on the balance sheet, see the article “Filling out Form 1 of the balance sheet (sample)” , and about form 2 - “Filling out Form 2 of the balance sheet (sample)” .

Profitability or return on equity - standard value

The main criterion used in assessing return on equity is to compare this indicator with the return on investment in other areas of business, for example, securities other companies.

The standard value of ROE is widely used to assess the effectiveness of investments. Typically, investors focus on values ​​from 10 to 12%, which are typical for businesses in developed countries. If inflation in the state is high, then the return on capital increases accordingly. For Russian economy 20 percent is considered the norm.

If the indicator goes negative, this is already an alarming signal and an incentive to increase the return on equity capital. But a significant excess over the standard value is also an unfavorable situation, since investment risks increase.

Results

Profitability or return on equity is important for assessing the efficiency of an enterprise. To find this indicator, several formulas are used, data for which is taken from the lines of the balance sheet and income statement.