Profitability in percentage per annum. Profitability
"Today's investor does not profit from yesterday's growth"
(Warren Edward Buffett)
Now I am summing up the results of the first year of my public project "Reasonable Investor". I will publish it soon, I'm not particularly in a hurry, since I'm not going to do anything until autumn - neither buy nor sell ...
All year I have been defining profitability my portfolio according to the methodology used by mutual funds when calculating the value of shares. In principle, this is correct, but only for the price of shares. The result of a particular investor will be very different.
There is one caveat that complicates everything when it comes to determining profitability. These are I / O operations!
Earlier voiced mine result + 17.89%, turned out to be incorrect (more precisely, this is not my profitability, but a change in the value of a share - if my portfolio were a mutual fund and I took money for management from the shareholders).
Since I made regular investments, and also withdrew funds twice, then this method can no longer be used, it distorts the actually obtained profitability. Real profitability turned out + 23.78% per annum(just boring 24% per annum, which on these weekends discussed on sMart-Lab)))
I think many will find it useful to read this post. Until recently, I did not even know this information, it seemed to me that the method used was quite acceptable.
« How to calculate profitability?”, At first glance, this question should not cause the slightest difficulty. Many people know that in order to calculate the profitability, it is necessary to divide the result of the investment by the amount of the invested funds and translate the resulting value into annual percentages.
The formula for calculating the profitability (in percent per annum), if there were no deposits / withdrawals:
D = ((ΔS) / Sinit) * 365 / T * 100%, where
D is the required profitability,
ΔS - the result of investment in the absolute,
Sinit - the amount of initial investment,
T is the number of days in the period under review.
But the task of calculating the profitability becomes many times more complicated if, during the period under consideration, deposits or withdrawals of funds were carried out within the framework of the investment portfolio. As such, it is difficult even for experienced investment professionals.
The solution to this problem was suggested to me by my colleagues from Arsager Management Company
A bit of theory:
Let's start by defining what the inputs and outputs are Money... Depositing funds is the direction of money for investments. For example, you purchased investment units fund or deposited money into a brokerage account - all this is a deposit of funds. Withdrawal of investment funds is a withdrawal, that is, within the framework of the examples, conclusions arise when the investment shares are redeemed or money is withdrawn from the brokerage account.
Knowing what input / output is, let's consider a specific situation that will help to understand the logic of solving the problem of correctly determining the profitability, taking into account the input / output of funds.
A certain investor purchased shares in the amount of 1,000 rubles ( S start).
After 3 months, he bought another 500 rubles worth of shares ( Svv).
After another 4 months, the investor urgently needed money, and he was forced to sell part of the shares in the amount of 300 rubles ( S out).
One year after the initial acquisition, the shares were valued at RUB 1,300 ( Sitog).
In the form of a graph, this situation can be represented as follows:
To correctly calculate the return on investment, we still need to divide the result of the investment by the amount invested. It remains only to determine what is the result in the situation under consideration and what is the correct amount of invested funds.
The first step will be the calculation of the investment result. It is intuitively clear that the result of an investment is the difference between the funds that were received and those that were invested. That is, it is necessary to subtract the amount of the initial and subsequent inputs from the sum of the total cost of the investment and all outputs.
Formula for determining the investment result, taking into account inputs / outputs:
ΔS = (S total + ΣS out) - (S start + ΣS out), where
ΔS is the investment result for the period in absolute terms,
Sitog - final assessment of investments (1,300),
ΣSout - the sum of all withdrawals (300),
Sinit - the amount of initial investment (1,000),
ΣSvv - the sum of all deposits of funds (500).
Let's apply this formula to the considered situation: ΔS = (1300 + 300) - (1000 + 500) = 100. Thus, the investor earned 100 rubles.
Second step in the calculation of profitability is the most important: it is necessary to correctly determine with what amount to correlate the calculated investment result, that is, to correctly determine the amount of invested funds.
In each time sub-period (T1, T2, T3), the amount of funds invested was different. In the sub-period T1 - 1000 rubles, T2 - (1000 + 500) rubles, T3 - (1000 + 500-300) rubles. Moreover, these time sub-periods themselves are not equal. T1 - 90 days, T2 - 120 days, T3 - 155 days. Therefore, it is necessary to reconcile the amount of invested funds with the number of days in the sub-period, thus determining the average "working" amount ( time-weighted average investment) in the period under consideration.
Formula for determining the weighted average amount of invested funds, taking into account inputs / outputs:
V = (T1 * Sinit + T2 * (Sinit + Svv) + T3 * (Sinit + Svv-Sout) + ... + Tn * (Sbegin + ΣSvv-ΣSout) / ΣT, where
V is the weighted average amount of funds invested,
T1, T2, T3, Tn - the number of days in the sub-period,
ΣT is the total number of days in the considered time period.
Let's apply this formula to the considered situation: V = (90 * 1000 + 120 * (1000 + 500) + 155 * (1000 + 500-300)) / 365 = 1249.32.
The weighted average amount of funds invested by the investor was 1249.32 rubles.
Now we know all the elements needed to directly calculate the profitability.
Third step- calculation of profitability from the obtained values. To do this, we divide the previously calculated investment result by the weighted average amount of the invested funds and translate the result obtained into annual percentages.
The formula is as follows: D = (ΔS / V) * 365 / T * 100%
It turns out that in the considered situation, the profitability is: (100 / 1249.32) * 365/365 * 100% = 8% per annum.
Conclusions:
Using these formulas, you can always correctly assess the profitability of your investment portfolio and, using the obtained values, evaluate the effectiveness of your investments.
The considered algorithm is not simple, but when it comes to calculating profitability and profit, the main thing is accuracy. This algorithm allows you to take into account all the nuances associated with the input / output of funds and get the correct calculation of profitability.
If you use trust management services, find out how the profit and return on your portfolio is calculated and, if it differs from the above algorithm, then this is a reason to check the correctness of the algorithm used.
It is necessary to pay close attention to the calculation of the profitability of your investments, since this indicator is decisive in the analysis of investment efficiency and, if it is calculated incorrectly, it will create a wrong idea of the efficiency of your investments.
T Now a practical calculation for my portfolio.
As I wrote earlier, I counted the changes in the portfolio using the “mutual funds” method, i.e. when depositing new funds, I determined a new NAV and divided it by the “share value” before depositing funds, thereby increasing the number of shares to continuously continue the portfolio value graph.
In fact, I was counting on the change "Share prices", but this is not real profitability my investment, since this method does not take into account the amount of deposit / withdrawal of funds. I could introduce new money in case of drawdowns, and withdraw at peaks, and as a result, the “share price” chart could be at zero - and the result of investments in a good plus.
I will make calculations portfolio return according to the formula above, taking into account all inputs / outputs and dates of transactions, as well as the total financial result:
It turned out + 23.78% per annum.
+ 21.76% for 334 days - per annum (for 365 days) this is + 23.78%. So I counted everything correctly.
Quite significant distortion - 24% or 18% - there is a difference! If you manage assets and do not deposit or withdraw funds for a year, then the definition of profitability by the method of "mutual funds" is appropriate, but if you deposit and withdraw funds, then do not use this method - deceive yourself or your investor!
By the way, some cunning managers, showing their equity on history, they resort to such a trick - having a mega-result on a small amount, and later when investors introduce more significant money - the result may worsen, but equity will still be attractive to new investors.
For example, equity growth 5 times in 2 years, of which in the first year the equity increased 4.5 times with an initial capital of 100 thousand rubles, and then at the end of the first year another 50 million rubles were contributed, and the result for the second year was only + 11%, but there will be a beautiful growth on equity in 2 years 5 times!
According to the method of determining the “share price”, everything will be beautiful, but in terms of real profitability for the investor, it will be much more modest. I recommend to be more attentive to such moments ...
What method do you use?
Both methods can and should be used - but for different purposes, you must understand this. If you are a mutual fund (or IMU) and take the money into management, it is necessary to determine the value of the share, but in addition, you need to determine the profitability of each specific investor. It will differ depending on its deposit / withdrawal operations.
P.S. By the way, because of this nuance, sometimes there is an erroneous determination of the result of profitability for a particular investor, which leads to misconceptions because of this.
A striking example is Elvis Marlamov who contributed funds this spring to buy stocks on a market failure. Was he even accused of it? Is deposit / withdrawal of funds evil for an investor?
I believe that this is a plus for the manager - the ability to the right moment press the gas. The use of the shoulder - I'll leave it out of the brackets, it's everyone's business, I would not use it. But putting in funds to buy inadequately cheap assets is buzzing.
He did everything right! Made money on this panic.
But his equity in public accounts is also at the bottom. How can this be? They even write that Elvis leaked everything ?! Is it really? Or is it a minus of the generally accepted system for determining profitability?
The trouble is that the public determines only the “share price” of each investor, and not the real profitability that a particular investor makes.
Elvis promised to send me the necessary data to calculate the real profitability. To be continued!
Successful investment!
Today we will talk about how to calculate return on investment... My communication practice shows that many people make mistakes when calculating the return on investment, they think it is wrong. As a result, distorted data are obtained, thanks to which they can accept incorrect ones. In addition, incorrect calculation of the return on investment, showing overestimated data, is often used by unscrupulous financial companies in order to attract customers.
So how do you calculate your return on investment? It is most correct to make the calculation not in absolute terms, but as a percentage in relation to the invested amount of capital. Moreover, it should lead to some value that is the same for all investment directions, for example, to annual interest or monthly interest.
When investments involve some kind of one-time income (for example,) or a clearly specified regular income (), it is quite easy to calculate the return on investment. This can be done as follows.
Calculation of profitability for speculative investments:
CI = ((Sk. - Sn.) / Sn.) * 100%,
where Cн. - the initial cost of the asset, CK. - the final cost of the asset. In this case, it is advisable to translate the result obtained into the annual return on investment:
Dig. = (CI * 365) / n,
where n is the number of days that the speculative asset was held by the investor.
Let's consider an example... The investor bought shares for 10,000 rubles and after 50 days sold them for 11,500 rubles. The return on investment in this case is ((11500-10000) / 10000) * 100% = 15% in 50 days. The annual return on investment is (15% * 365) / 50 = 109.5% per annum.
For verification: if an investor had invested 10,000 rubles at 109.5% per annum, he would have received in 50 days (10,000 * 109.5% * 50) / (100% * 365) = 1,500 rubles. That is, our calculation of the return on investment is correct.
Calculating the return for investments that generate a fixed regular income:
Let's say an investor has invested in a fund that provides for the payment of 10% of income once a quarter. Actually, the quarterly return on investment has already been determined and indicated in the agreement signed by the parties - it is 10%. How to calculate the annual return on investment in this case?
In this case, it all depends on what interest is paid to the investor: simple or complex, that is, whether they are capitalized with each payment (added to investment capital) or not.
If this simple interest, then you can calculate the annual return on investment by simply adding the profitability of each period:
Dig. = CI * n,
where CI is the return on investment during the period of payment, and n is the number of such periods in a year.
Let's consider an example... The investor has invested in someone else's business, the owner of which has undertaken to pay 5% of the invested amount every month. In this case, the annual return on investment will be 5% * 12 months. = 60% per annum.
If this compound interest, then the calculation of the return on investment should be made according to the following formula of compound interest:
Dig. = (1- (1+ (CI / 100%)) ^ n) * 100%,
where CI is the return on investment for a period, n is the number of periods in a year.
Rating 4.6 out of 5. Votes: 5Let's consider an example... The investor has invested in a credit cooperative, which pays him a quarterly profit of 10%, moreover, the interest is capitalized. In this case, the annual return on investment will be (1- (1+ (10% / 100%)) ^ 4) * 100% = 46.41%
For check . Let's say the investment amount is 10,000 rubles.
Income in the 1st quarter = 10,000 * 0.1 = 1,000 rubles. The capital has become 10,000 + 1,000 = 11,000 rubles.
Income in the 2nd quarter = 11000 * 0.1 = 1100 rubles. The capital became 11000 + 1100 = 12100 rubles.
Income in the 3rd quarter = 12100 * 0.1 = 1210 rubles. The capital became 12100 + 1210 = 13,310 rubles.
Income in the 4th quarter = 13310 * 0.1 = 1331 rubles. The capital became 13310 + 1331 = 14641 rubles.
In general, over the year, capital increased by 14641-10000 = 4641 rubles. In relation to the initial capital, this is exactly (4641/10000) * 100% = 46.41%.
How to calculate the return on investment, which changes every month? In investment practice, options are much more common when the profitability changes monthly: when it is more, when it is less, and sometimes it can even be negative (losses are recorded). For example, this happens when stock speculation, transfer of capital to, etc. In this case, the calculation of the return on investment must be made according to the following formula:
Dig. = (1- (1+ (DI1 / 100%)) * (1+ (DI2 / 100%)) * ... * (1+ (DIn / 100%))) * 100%,
Let's consider an example... Let's say an investor has transferred capital to trust management for a year with the condition of quarterly fixation of the financial result. The following indicators of return on investments were recorded:
1st quarter - + 40% (profit);
2nd quarter - -15% (loss);
3rd quarter - + 5% (profit);
4th quarter - + 20% (profit).
In this case, the annual return on investment will be (1- (1.4 * 0.85 * 1.05 * 1.2)) * 100% = 49.94%
For check . Let's say the invested capital is 10,000 rubles.
Income in the 1st quarter = 10,000 * 0.4 = 4,000 rubles. The capital has become 10,000 + 4,000 = 14,000 rubles.
Loss in the 2nd quarter = 14,000 * 0.15 = 2,100 rubles. The capital has become 14,000-2,100 = 11,900 rubles.
Income in the 3rd quarter = 11900 * 0.05 = 595 rubles. The capital became 11900 + 595 = 12495 rubles.
Income in the 4th quarter = 12495 * 0.2 = 2499 rubles. The capital became 12495 + 2499 = 14994 rubles.
In general, over the year, the capital increased by 14994-10000 = 4994 rubles or exactly (4994/10000) * 100% = 49.94% in relation to the initial capital.
Now consider, how to determine the average return on investment for 1 settlement period... In this case, you need to use the formula for the geometric mean or proportional mean:
Disr. = (1- (1+ (DI1 / 100%)) * (1+ (DI2 / 100%)) * ... * (1+ (DIn / 100%)) ^ 1 / n) * 100%,
where DI1, DI2,…, DIn is the return on investment for each analyzed period, n is the number of such periods in a year.
In our previous example, the average return on investment will be (1- (1.4 * 0.85 * 1.05 * 1.2) ^ 1/4) * 100% = 10.66%
Check the result:
Income in the 1st quarter: 10,000 * 0.1066 = 1066 rubles. The total capital is 10,000 + 1068 = 11,066 rubles.
Income in the 2nd quarter: 11066 * 0.1066 = 1179.64 rubles. The total capital is 11066 + 1179.64 = 12245.64 rubles.
Income in the 3rd quarter: 12245.64 * 0.1066 = 1305.39 rubles. The total capital is 12245.64 + 1305.39 = 13551.03 rubles.
Income in the 4th quarter: 13551.03 * 0.1066 = 1444.54 rubles. Total capital 13551.03 + 1444.54 = 14995.57 rubles
That is, we got the same result with an error of 1.57 rubles, which arose due to rounding off. This means that the calculation of the average return on investment using this formula is correct.
In practice, many admit significant error in calculating the average return on investment, considering it according to the formula of the arithmetic average, not the proportional average. Moreover, such a mistake can be made both unknowingly and deliberately in order to overestimate the average return on investment. For example, wealth managers and investment companies can do this.
Consider example wrong calculating the return on investment for the above case. (40% -15% + 5% + 20%) / 4 = 12.5% in the billing period.
Let me remind you that the correct figure is 10.66% during the billing period. As you can see, the wrong calculation method overestimated the result by almost 2%. In the event that there are more settlement periods (for example, the calculation of the return on investments is made once a month, and not once a quarter), the difference may be even more significant.
In our case, in fact, the investor will receive an income based on the average return on investment of 10.66%, but it can be given to him as 12.5%. Be carefull!
Now you know how to calculate the return on investment in different situations. I hope I didn't tire you with calculations too much: they were really needed and important in this topic. In practice, it is very convenient to calculate the return on investment in an Excel spreadsheet, having previously filled in the necessary formulas there. Of course, it is better that this whole process is automated in this way, which means it is significantly simplified.
In addition, it should be understood that the gross return on investment is calculated here, and the net return can be obtained by subtracting investment costs and taxes paid (if any) from the result.
Until next time! Learn not only to earn, but also to correctly take into account your income!
Yield or Rate of return (eng. Rate of return) - 1.the relative indicator of the effectiveness of investments in certain assets used in the economy (in finance), financial instruments, projects or business in general. 2. Ability, ability to generate income. 3. The ratio of aggregate cash receipts that the asset brings to its price.
Profitability can often be estimated as the ratio of the absolute value of income to some base, which usually represents the amount of initial investments or investments that must be made to obtain this income.
Economic literacy - webinar on risk and return:
Where: r - profitability; V e - the final cost of the financial asset; V b - the initial cost of the financial asset.
Security yield
Security yield - quantitative characteristic security, which determines its value for the investor.
The profitability depends on the risk measure. Typically, the higher the return on a security, the higher the risk.
Yield in general view is calculated by the ratio of the profit received by the investor during the time of holding the security to the cost of purchasing it.
The yield is usually defined as a percentage.
There are the following types of profitability:
- Yield to maturity (for bonds)
- Current yield (for stocks and bonds)
- Dividend yield (for stocks)
- Annual Percentage Yield
- Internal profitability
Profitability and risk - The essence and methods of measuring profitability
To achieve its main goal - to maximize the welfare of the owners - the company must constantly ensure the investment of available capital in the assets that bring the greatest income. In its most general form, income can be defined as an increase in the welfare (wealth) of owners for a certain period of time:
Income for the period = Wealth at the end of the period - Wealth at the beginning of the period
The total amount of income received by the owner of capital consists of two parts: current income and capital gains. For example, having bought an apartment, you can rent it out and receive income in the form of rent. You can live in a purchased apartment and after a few years find that its price has increased significantly in comparison with the time of purchase. In the first case, the apartment will bring current income, in the second, the income will be received from the increase in the cost of the apartment. The owner of an apartment, who rented it out, can sell it in a few years and thus realize both types of income - current and value gain. Likewise, when buying a share, an investor can expect to receive current income in the form of periodic dividend payments. However, if after some time the market price of the purchased share increases, then it will become even richer by the value of the increase in value. Thus, total income from owning a share will be equal to the amount of dividends received on it and the amount of its growth market value... The income of the owner of the bond is formed in the same way. If they purchase a coupon bond, they will receive current income in the form of periodic coupon payments. When buying a discount bond, the income is realized as the difference between the selling and buying prices. These two types of income (current and capital gains) can be realized jointly if the interest rate decreases during the period of holding the coupon bond. Coupon payments will remain unchanged, but the market price of the bond will rise, therefore, along with the current income, its owner will also receive income from the increase in the value of the bond.
It is very important to understand that from the point of view of finance, both of these types of income are equivalent for the owner and must be taken into account when making calculations. Often the concept of profitability is tied to an asset, financial transaction or an enterprise. For example, you can talk about the profitability of a stock or the profitability of sales. This approach is justified for a comparative assessment of the effectiveness of various areas of capital investment: product A can provide more profit than product B, and investments in financial assets may be even more profitable. It should not be forgotten that income is generated not by the assets themselves, but by the capital invested in them. Therefore, it is more correct to talk about the return on equity, rather than individual assets or operations. Capital can be simultaneously invested in both real and financial assets, which can generate both current income and increase (or decrease) in their value. The profitability of individual operations will rather reflect the efficiency of the managers responsible for their implementation - the director of the plant or the stock broker. The total return applies to all invested capital, that is, it must be calculated from the position of the owner of this capital.
Having capitalized 1 thousand rubles out of the total value of his property, the owner has the right to hope for a subsequent increase in his aggregate welfare. Suppose that 500 rubles out of this thousand were invested in equity trade enterprise. The store director, having purchased goods for them, sold it for 750 rubles, that is marginal income amounted to 50% (250/500). After deducting the main commercial and administrative expenses, the profit from sales was 100 rubles, that is, the return on sales was 20% (100/500). Covering others transaction costs and having paid income tax (only 50 rubles), the director reflected in the statements a net profit in the amount of 50 rubles. 20 rubles of this amount were returned to the owner in the form of dividends, and 30 rubles were reinvested in the enterprise.
The second half of the capital (500 rubles) was controlled by a broker who bought securities with this money. By the end of the year, the total income from owning these securities (and the current and the increase in their value) amounted to 500 rubles, that is, 100%. Commissions and other expenses were withheld from this amount by the broker, as well as taxes were paid in the amount of 300 rubles. That is, the real increase in the wealth of the owner of capital amounted to 200 rubles (500 - 300). The total return on all invested capital will be 25% ((20 + 30 + 200) / 1000). As you can see, this value differs from both the return on sales and from the return on securities. Evaluating the work of his agents (director and broker), the owner can conclude that the store's net profitability was 10% (50/500), and the net profitability of financial speculations was 40% (200/500). But neither the first nor the second figures reflect the real total return on the capital invested by him. It is equal to 25%. It is on this figure that he should be guided in his plans for the future.
So, speaking of profitability, one should mean the efficiency of using all the capital invested by the owner and take into account all net income (in the form of both current payments and capital gains) received by the owner of the invested capital. For the analysis, any indicators of profitability (profitability) of assets, operations, projects, etc. can be calculated, but it must be remembered that the most common financial performance is the total return on invested capital. The income to the owner is brought not by the assets themselves or operations with them, but by the capital invested in them.
Profitability is derived from total amount cumulative net income, produced by capital for a certain period of time, and the amount of wealth of the owner of capital at the beginning of the period. Since the welfare at the end of the period will be equal to the sum of its value at the beginning of the period plus the value of the total net income received by the owner for the entire period, the formula for calculating the yield can be represented as follows:
where indices 0 and 1 denote the beginning and end of the time period, respectively.
The problem of accurately measuring the real value of all property owned by an investor is not directly related to financial management. Therefore, the value of his welfare at the beginning of the period is taken equal to the amount capital invested by him. The formula for determining the total holding period return (HPR) can be represented as follows:
where CF is the flow of current income received by the owner from the invested capital for the period;
I0 - the initial amount of invested capital (investments at the beginning of the period);
I1 - the final (accumulated) amount of invested capital (investments at the end of the period);
rC - current profitability;
rI is the return on capital gains (capitalized return);
r - total profitability.
Profitability is one of the main indicators of investments, by which one can assess the profitability of investments, their feasibility and compare them with each other by this indicator. Often, to assess the profitability of investing money, the risk-return link is used. The logic here is simple: indicators such as profitability and risk themselves are not very informative. What is the point of investing in instruments with a high level of risk and low potential profitability? If the risk of losses is high, then the possible reward should also be high.
Let's separate the concepts of income and profitability. Income is an absolute value expressed, for example, in monetary units(Vasya invested 10,000 rubles and received an income of 2,000 rubles.) While the profitability is a relative value, expressed as a percentage or interest per annum, more on that later (Sasha invested his money in commercial real estate with a yield of 25% per annum).
Formula for calculating profitability
Further there will be material with formulas, but do not be afraid - any person who studied at school will understand them - they are easy to understand. In addition, the display of pictures must be enabled in your browser, since the formulas are shown in the form of pictures.
The simplest formula for profitability is the ratio of the profit earned to the amount of investment, multiplied by one hundred:
where sum1 is the initial amount,
sum2 - the final amount.
However, these formulas do not take into account such an important indicator as time. For what period is this profitability? Over 100 years? Or in 3 months? To take into account the time for which the investment showed profitability, the following profitability formula is used:
where the term in months is the time during which the investment takes place.
The most common period for calculating profitability is 1 year (you don't have to go far for examples - the same bank deposits are calculated as a percentage per annum).
For example, the owner of a $ 15,000 apartment at the beginning of the year rented it out and received an annual rent of $ 1,000 from the tenant. By the end of the year, the cost of the apartment increased and amounted to 17 thousand US dollars. The total yield of apartment ownership for the year will be 20% (1 + (17 - 15) / 15), including the current yield of 6.67% (1/15), capitalized yield of 13.33% (2/15). More precisely, we should talk about the return on capital invested in the purchase of an apartment.
As follows from formula (5.1.1), the amount of profitability is influenced not only by the absolute amount of income received, but also by the amount of investment (I0). In other words, the same absolute amount of income of 1000 rubles will mean a different level of return for capital of 10 thousand and 10 million rubles. In the first case, the yield will be 10% (1,000 / 10,000), and in the second - 0.01% (1,000 / 10,000,000). The relative rate of return eliminates the influence of the scale factor and more accurately reflects the real financial and economic efficiency of the use of invested funds than the absolute value of the income received.
Profitability always refers to a specific period of time. For example, 1 thousand rubles can be earned in a month, or in a year. Even calculating the relative rate of return will not make these numbers comparable. If we continue the example and assume that an investment of 10 million rubles brought an income of 1 thousand rubles in 1 week, and an investment of 10 thousand rubles provided the same income in 6 months, then the profitability values obtained above will not be objective enough. To ensure the comparability of these indicators, they must be brought to a single time base. In finance, profitability is usually adjusted to annualized rates, that is, the original data is annulled. Comparing the formulas for calculating the yield and the formula for the annual interest rate (2.2.1), you can see their identity. Both the yield and the interest rate reflect the growth rate of the initially invested amounts. By calculating the yield, in essence, the value of the corresponding interest rate is determined.
Exists different ways interest accrual and, accordingly, different interest rates. Extension by idle and challenging rates leads to different results. What specific rate should be used in determining the annualized rate of return? In finance, it is customary to use an effective complex as a measure of profitability. interest rate, that is, the annual rate assuming a one-time reinvestment of the accrued interest during the year. However, for short-term financial transactions (less than 1 year), a simple interest rate is allowed. So, for example, the yield on T-bills was calculated at the rate simple interest(formula 2.2.14) on the assumption that the length of the year is 365 days. Of course, such ambiguity complicates the life of the financier, but the difficulties that arise should not be absolutized. First of all, it is necessary to understand that the method of annulling profitability in no way affects the real parameters of the financial transaction under consideration. Profitability is an abstract measure used to ensure comparability and comparative assessment of various capital investments. Therefore, when comparing two investments in terms of their level of profitability, it is important to make sure that the methods for calculating these indicators are comparable. The question of which of the calculation methods is better or “more correct” is not the most important one. It is required that the same cancellation method is used for both operations.
It is important to differentiate the indicator of profitability with revenue. If revenue simply reflects the total turnover of the company (it is calculated in rubles), then profitability is the efficiency of its activities (expressed in%). Any business that has brought profit at the end of the period under review can be called profitable. If a loss is incurred, the profitability will be negative.
In trading, the profitability of a product is calculated as the ratio of net profit to cost.
Profitability of goods (services) = net profit from sales (provision of services) / cost * 100%.Let's say a company sells women's clothing. She bought goods for 12 million rubles, sold - for 28 million rubles. At the same time, administrative and commercial expenses amounted to 5 million rubles. Thus, the profit amounted to 11 million rubles, and the profitability of goods - 11/12 * 100 = 91%.
Return on sales (services) = net profit / revenue * 100%.
The profitability of services is calculated in a similar way, in this case, the cost price does not take into account the purchase price of the goods, but, for example, the cost of purchasing tools, wages of workers, etc.
The assessment takes into account the company's net profit and turnover. If we take c as a basis, then it will be equal to = 11/28 * 100% = 39.2%. Using this formula, it is desirable to evaluate each product group separately. For example, the profitability of sales of T-shirts, bags, etc. This will allow us to highlight the most effective positions in the assortment, as well as those that need to be worked on to increase the profitability.
Acceptable level of profitability by industry
There is no single acceptable rate of return; it varies from industry to industry. So, for example, in the mining industry, the profitability of sales is considered normal above 50%, and in the woodworking industry it does not reach 1%.
According to researchers, the average Russian profitability indicator is about 12%. However, this value in itself is practically meaningless if not compared with similar indicators of competitors' performance or industry average values.
Please note that if the profitability of your business deviates significantly from the industry average (by 10%), this increases the likelihood of a tax audit.
According to RIA-rating, the average sales by industry in 2013 were as follows:
- mining operations - 26.3%;
- chemical production - 18.3%;
- textile production - 2.8%;
- Agriculture - 11.7%;
- construction - 6.7%;
- wholesale and retail trade - 8.2%;
- financial activities - 0.4% (2012, Rosstat);
- healthcare - 6.5% (2012, Rosstat).
In the service sector, a profitability of 15-20% is considered acceptable.
If you find that you are seriously lagging behind your competitors in terms of business efficiency, you need to work to increase the level of profitability. This task can be achieved through a competent marketing policy aimed at increasing the customer base and ensuring an increase in the turnover of goods, as well as by obtaining more favorable offers from suppliers of goods (or subcontractors).
Sources:
- what percentage of profitability
- Assessment and selection of investment
In conditions market economy profit is the main indicator that characterizes the efficiency of the enterprise. Profitability is a relative indicator that comprehensively reflects the level of efficiency in the use of labor, money, material goods and resources. By the size of the profit received, it is possible to determine the profitability of the production of the enterprise, its current assets, capital, financial investments, products, services provided by the organization, etc.
You will need
- - calculator;
- - documents of financial and accounting statements.
Instructions
First of all, consider the budget that you have available to produce a product or provide a service. The success and effectiveness of a particular type of product primarily depends on the quality of the forecast for its further promotion on the market. This information can be obtained from the reporting for the previous year in order to use it as a baseline for further forecasting.
Make an investment budget. The main purpose of drawing up this document is to provide for all the necessary expenses, and not income, since the planned products may not be profitable at all and, accordingly, will not bring any profit.
Correlate the planned budget with the investment budget in order to determine whether there is enough money to cover the costs used for the production of products and whether the introduction of new costs is necessary. If the investment amount is insufficient, it is advisable to reassess the planned costs.
In the field of investment expected return (English Expected Rate of Return) represents the interest rate or amount that an investor expects to receive over a certain period of time from an investment in a particular asset. From a practical point of view, this indicator can be calculated based on the full set of probabilities, or based on historical data on the return of an asset.
Formula
If the full set of probabilities is known in advance, that is, the probabilities of all possible options the outcome of events, the expected return can be calculated using the following formula:
where P i- the probability of the i-th outcome of events;
k i- profitability at the i-th outcome of events;
n- the number of event outcomes.
In real financial market the investor usually makes a decision based on the information available about the historical performance of the security. In this case, the expected return is calculated as the arithmetic mean:
k i- the yield of the security in the i-th period;
n- the number of observations.
Calculation example
Example 1... The financial analyst is considering adding one additional share to the investor's portfolio, choosing from three companies operating in the wholesale and retail trade. At the same time, he considers three possible scenarios for the development of events, the probability and expected profitability of which are presented in the table.
To determine the expected return on each security, you need to use the first of the above formula. For shares of Company A it will be 11.25%, shares of Company B 12.4% and shares of Company C 12.9%.
A = 0.25 * 18 + 0.5 * 12 + 0.25 * 3 = 11.25%
B = 0.3 * 22 + 0.45 * 14 + 0.25 * (- 2) = 12.4%
B = 0.2 * 35 + 0.45 * 17 + 0.35 * (- 5) = 12.9%
If other factors (for example, risk) are not taken into account, then it is advisable to include the shares of Company B in the investor's portfolio, since they are characterized by the highest expected return.
Example 2... A financial analyst needs to estimate the expected return on stocks based on historical returns for the last 7 weeks, which are presented in the table.
Since the analyst only knows the historical performance of the stock, it is necessary to use the second of the above formulas.
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