Return on equity is negative. ROE is the essence of business

There is a fairly wide list of indicators necessary to calculate the effectiveness of an organization. The main share in this group is occupied by different kinds profitability. They are necessary for a more complete and objective analysis of performance results.

What is profitability in simple words

Most often, it reflects how many kopecks of a particular type of profit an organization can receive by investing one ruble in production. And in the case of sales efficiency indicator, profitability shows the share of profit in revenue.

What types, indicators, profitability ratios exist

It is customary to distinguish several groups of indicators - production, sales, capital. In each category, 3-4 values ​​are calculated. It cannot be said that all indicators are equivalent and you can take only one from the group.

In order to evaluate efficiency, it is necessary to use the entire set of types of profitability.

Return on assets

They use profit before tax and reflect how effectively the organization’s fixed assets are used and show how much profit a ruble of fixed and working capital or the total assets of the enterprise:

• fixed assets (ROFA – return on fixed assets);
• working capital (ROFA – return on currency assets);
• assets (ROA – return on assets).

The basic earning power ratio (BEP) characterizes how much a company needs to earn to cover all costs.

Production and sales profitability

They are calculated on the basis of profit from sales and show the effectiveness of the main activities of the organization:

• products (ROM – return on margin) characterizes how much profit from sales can be obtained from one ruble, taken into account in the cost of manufactured products;
• sales (ROS – return on sales) reflects the share of profit from sales in the total income of the enterprise;
• personnel (ROL – return on labor) describes how much profit the company will receive from the operation and employment of employees.

Return on Equity

Net profit is taken as a basis and characterizes the efficiency of using capital for the company’s activities. Also, this subgroup can be calculated during planning and allows you to assess whether it is profitable to invest or borrow:

• equity(ROE – return on equity) reflects the efficiency of using own funds in the activities of the enterprise;
• invested, permanent capital (ROIC – return on invested capital) shows how many kopecks of net profit the organization will receive by investing one ruble in investments;
• borrowed capital (ROBC – return on borrowed capital) describes the feasibility of taking out a loan. If the indicator is higher than the cost of borrowed funds, then it is profitable to take them, if lower, then the organization will suffer losses.

Video - 12 main profitability ratios:

How to calculate profitability

IN general view The profitability formula is the ratio of profit to part of the enterprise’s property, revenue or cost:

Profitability = Profit / Indicator whose profitability needs to be found

For example, if the efficiency of fixed capital is needed, then the numerator will be profit from sales, and the denominator will be average cost fixed assets. In the case of, revenue is substituted into the denominator as an indicator of sales.

Return on assets is usually found by book profit, production and sales - by profit from sales, capital - by net profit.

Data for calculation are taken from the balance sheet and income statement.

General formulas for calculating profitability

Assets:

ROFA = BN/C VNA, Where

ROFA – return on non-current assets,

C vna – average cost of non-current assets, rub.;

ROCA = BN/C both, Where

ROCA – return on working capital;

BN – profit before tax, rub.;

C both – average cost of mobile assets, rub.;

ROA = BN / C vna + C both, Where

ROA – return on assets;

BN – profit before tax, rub.;

C vna + C both – average value amounts of fixed and current assets, rub.

Production and sales:

ROM = PR / TC, Where

ROM – profitability of products;

PR – profit from sales, rub.;

TC – total cost;

ROS = PR / TR, Where

ROS – return on sales;

TR – sales revenue, rub.

ROL = PR / SSCH, Where

ROL – personnel profitability;

PR – profit from core activities, rub.;

SSN – average number of personnel.

Capital:

ROE = PE / SK, Where

ROE – return on equity;

PE – net profit, rub.;

SK – equity capital, rub.;

ROBC = PE/ZK, Where

ROBC – return on debt capital;

ZK – borrowed capital;

ROIC = PE / SK + DO, Where

ROIC – return on invested (fixed) capital;

PE – net profit, rub.;

SK + DO – the sum of equity and long-term debt, rub.

Example of calculation by balance

The company Ekran LLC ended the period with the following financial indicators. It is necessary to display the effectiveness of the organization's activities for 2014. The average number of personnel is 25 people. The amount of equity capital is 120,000 rubles.

Calculation of return on assets:

ROFA = 48,000 / (100,000 + 150,000)/2 = 0.384

ROCA = 48,000 / (50,000 + 60,000)/2 = 0.87

ROA = 48,000 / (125,000 + 55,000) = 0.26

Calculation of profitability of production and sales:

ROM = 50,000 / 25,000 = 0.5

ROS = 50,000 / 75,000 = 0.67

ROL = 50,000 / 25 = 2,000

Calculation of return on capital:

ROE = 40,000 / 120,000 = 0.3

ROBC = 40,000 / 15,000 = 2.66

ROIC = 40,000 / 120,000 + 15,000 = 0.296

Conclusions from the calculations in the example:

For existing production, all indicators are at normal levels. It's obvious that borrowed funds it is profitable to use, employees work efficiently, the amount of working capital is optimal. It is worth paying attention to fixed capital; there is a possibility that it is not fully exploited or there are reasons that reduce the performance of non-current assets.

It is also advisable to analyze the situation with a large amount of equity capital, which reduces the overall efficiency of the enterprise. Given current indicators, it is rational to use and restructure equity capital.

In what cases is its calculation useful?

The indicator is necessary for a qualitative assessment of the efficiency of the enterprise. Absolute indicators, such as profit and cost, do not provide a true picture of the organization's performance.

They only show the effect of production. Profitability, in its turn, allows you to assess how well and fully the company’s property and resources are used. It shows how much money can be obtained from the operation of one or another type of own or borrowed funds.

All types of profitability are important for assessing the effectiveness of an organization. Like others relative indicators, they allow not only to analyze the activities of a given enterprise, but also to compare it with competing companies.

Profitability calculated over several years reflects the dynamics of performance and can become the basis for medium- and long-term planning. Special attention it is necessary to pay attention to the profitability of fixed assets, since they occupy a fairly large share of the organization’s property and are often used inefficiently.

Video about profitability and profitability:

Profitability of own capital ROE is a coefficient that shows the amount of profit per unit of equity value. Read how to calculate it, what restrictions on use there are, and also see an example of the calculation.

What does return on equity show?

What does an investor want to know when choosing an acquisition target? What income will the capital invested in the project bring and how great are the risks of investment at this level of profitability. What does a business owner want to know when making a decision about the fate of the company? Does the company bring him an income that is comparable to the risks in this business and higher than the return on alternative investments? Maybe a deposit would be better?

The return on equity (ROE) ratio answers the questions of investors and business owners. It is also called the return on equity ratio. Return on equity is a ratio that shows the amount of profit that an enterprise will receive on.

Return on equity formula

ROE = (Net profit for the period / Average equity for the period) x 100%

Return on equity formula for calculating the balance sheet

To calculate the return on equity ratio based on the organization’s balance sheet, the following formula is used:

ROE = (line 2400 Form 2 / line 1300 Form 1) x 100%

The data for the formula is taken from Form 2 of the Profit and Loss Statement and Form 1 of the Balance Sheet in the new edition.

How to calculate the return on equity ratio according to IFRS

According to IFRS the formula will look like this:

RSC= ROE =Net Income After Tax / Shareholder’s Equity,

where Net Income After Tax is net profit after taxes,

Shareholder's Equity - share capital.

Excel model for calculating and analyzing return on equity

Download a ready-made Excel model that will calculate return on equity and indicate the factors that caused the indicator to change compared to the previous period.

Standard ROE value

ROE important criterion in making investment decisions, both for the investor and for the business owner, because return on equity characterizes the profit that the owner will receive from a ruble of investment in the enterprise. The higher the value of the indicator in comparison with the alternative in terms of profitability, the more reasons to invest in this enterprise. The value of profitability below the level of alternative investments for an investor is a factor in project rejection; for a business owner, it is a factor in making negative decisions about the future of the company, but the business owner compares ROE primarily with the average profitability in the industry and the interest rate in the economy.

Some domestic sources call the standard value of the ROE ratio 20%. This value can be used as a guide for calculations. But for comparative analysis companies should use the industry value for companies in the same industry or the national average, if such statistics are available to the analyst.

Example of calculating return on equity

Let's calculate ROE using the above formula. For example, let's take annual reporting conditional company.

Table 1. Company balance sheet, million rubles.

Table 2. Report on the financial results of the company, million rubles.

Table 3. ROE calculation

The company showed an extremely low return on equity in 2017, but the negative indicator of the previous year justifies such values. It can be stated that the company has begun to reach the level of profitability.

Negative profitability is generally a negative assessment for a business - the company brings losses to its owners, such an asset is difficult to sell and is worth buying only if there are very good reasons for this, such as prospects for profit growth in the future. You will have to build a predictive business model and estimate return on capital in the future.

An important nuance - a business owner, when making a decision about the fate of his company based on ROE, must understand that the average amount of equity capital for a period is not at all the same as the market value of the company at the time of making the decision. So, if he is not satisfied with the return on the capital he has invested, perhaps the market value of the company is already significantly lower than the investments made and before selling the company it is necessary to improve its finances. That is, ROE alone is not enough to make a final decision.

« Dmitry, potential financial losses from a negative change in reputation are very difficult to translate into numbers. There is a great chance of slipping into subjectivism.»

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

I'm not a public company raising other people's money. I live on my own. Therefore, there is no need for me to advertise my research and observations. I post some things on blogs on Komona. And there is no point in going into details. It is enough to see the overall picture based on your own charts and statements. You constantly state in surprise that the Russian Federation is undervalued in terms of P/E. And what. He's only becoming more underrated. This is already obvious proof that the market does not care about P/E. Next, let's look at your HIT PARADE. In first place: Gazprom, VTB, Transneft. VTB has a special story. It's hard to imagine more ineffective investment management. Gazprom and Transneft probably already have a P/E of 1. So what. The market doesn't care about this at all. Because everyone clearly understands that no one here will ever receive any money except through speculative trading operations. There will be only investments in an infinitely happy future. What are your grades worth? construction companies. If stock exchange puppeteers had not maintained quotes there and the shares had not been pledged to banks, they would have long been worth around 0. What other research do you need to make it clear about the discrepancy between yours and the stock exchange realities? If the price on the market does not correspond to your expectations 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 Arsaghera’s basic mistake, demonstrating the non-market nature of her views. It is better to call it free cash flow rather than net. There is no other basic value for measurement in the market other than money, and any non-monetary paper income is not real income, but is profanation. Any capital investments in almost any enterprise reduce 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 stock exchange is pure speculation about 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 regarding investments is extremely clear to us; you have expressed it more than once. Now in your words there is one generality and no specifics. Let me give you an example: “Any capital investments in almost any enterprise” - please provide specific examples and calculations, prove that “ANY capital investments” and in “ANY enterprise”, you should not so easily throw out absolute statements.

“The price on the stock exchange is pure speculation about 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/

“Failure to understand this has ruined and will ruin a lot of newcomers to the market and companies that ignore this obvious fact.” - Beginners are ruined by speculation, if necessary, we can provide you with plenty of evidence of this. Besides, as has already been said, your “obvious fact” is not only not “obvious”, it is also not a “fact”.

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 joint stock. The calculation is made using the formula:

Net income includes dividends paid on preferred stock but excludes those paid on common stock. The capital value does not take into account preferred shares.

How is return on equity useful?

It makes it possible to judge how effectively it is used. It is important to consider: the ratio demonstrates the efficiency 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 organization - it is generally believed that he overstates the value of the company.

There are five main ways to interpret meaning:

1. Depreciation. A high ROE indicates uneven depreciation.

2. Growth rate. Companies that are growing rapidly have low ROE.

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

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

Return on equity (ROE, return on equity) - financial indicator, expressing return on equity. Close to the indicator return on investment ROI.
The indicator shows the ratio of net profit for the period to the equity capital of the enterprise.

Formula for calculating ROE ratio

ROE = PE / SK
, Where:
PE - net profit;
SK - equity capital.

Benefits of ROE

Disadvantages of ROE

• Long project duration - the longer the analysis period, the higher the ROE.
• A small share of total investments on the balance sheet. The smaller the share the higher the ROE.
• Uneven depreciation. The more uneven the depreciation is during the reporting period, the higher the ROE.
• Slow return on investment. The slower the project pays off, the higher the ROE.
• Growth rates and investment rates. The younger the company, the faster the growth of the balance sheet, the lower the ROE.

Standard ROE value