How to calculate profitability and return: methodology and practical examples

When an entrepreneur launches into the market, he needs to invest his time, money and be fully dedicated so that the company can take off in the environment in which it operates.

Therefore, you will need to have basic knowledge of accounting and finance. And if these topics are not in your repertoire, you will need to hire a specialized professional.

Even to check simple business performance indicators, some knowledge of these financial matters is necessary.

For example, to know whether your company is generating profits or losses, you need to know how to calculate profitability and return.

To do this, the entrepreneur or the person responsible for this sector must analyze the profitability and return obtained by the company, so that they can reach a correct conclusion and determine whether or not the company is performing financially as expected.

In addition to understanding how to calculate profitability and return, it is necessary to understand what both concepts mean within a company.

In this post, you will see the difference between profitability and profitability, as well as financial indicators such as ROI, ROS and ROE.

What is the difference between profitability and profitability?

When we talk about the profit obtained by a given company, we are referring to its profitability. In other words, the profit it has acquired with its products or services, after a certain amount of time in the market.

As for profitability, these numbers will show whether the investment made when setting up your company is already worth it or not.

In general, to obtain the result of his profitability, the entrepreneur will need to have all expenses catalogued or written down somewhere, so that he can calculate the total amount that was invested from the beginning.

Knowing the difference between both terms, the next step is to know how to calculate profitability and return.

How to calculate profitability and return?

As already defined, the profitability obtained through an investment is calculated based on data on the amounts injected into the company and the inflows of values, as the company is operating.

The calculation is quite simple, you will need to provide two pieces of data:

• net profit;
• the gross revenue that the company has had since it opened.

Before providing examples, it is necessary to understand that gross revenue is all the value acquired by the company, without any discount or withdrawal on it .

Net profit is the amount left after all bills, employees, goods and other costs and expenses have been paid .

How to calculate profitability index: ROS

With this calculation, it will be possible to know how much the company is earning from the sale of its products or provision of its services. It can also be known as the ROS Indicator .

How to calculate ROS – Return on Sales

The calculation to find out a profitability index can be described by the formula:

• Profitability = Net profit ÷ Total revenue x 100

Example: A clothing company with gross revenue of R$50,000 should have a net profit of R$5,000.

What will be the profitability index in this case?

Applying the values ​​in the formula, we will have:

• Profitability = (5,000 ÷ 50,000) x 100
• = 0.1 x 100
• Profitability = 10%

How to calculate profitability indicators: ROI and ROE

How to calculate ROI – Return on Investment

The first calculation to be made when you want to calculate the profitability of a company is the ROI ( Return on Investment ). In other words, the return on investment.

Unlike profitability, the calculation made for profitability consists of, initially, determining the total amount that was invested so that the company could gain momentum in the market.

In the formula, the net profit value will still be necessary, as well as the final multiplication by the number 100, which corresponds to a percentage value.

In this way, we can exemplify:

• Profitability = net profit ÷ amount invested x 100

Where the clothing company's net profit is R$5,000, and the total investment was R$200,000. We would have:

Profitability = (6,000 ÷ 200,000) x 100 = 3%

So your profitability index would be 3%.

How to calculate ROE – Return on Equity

To do this, you need to analyze all the values ​​contained in your company's DRE.

Example:

• ROE = (Net Income / Equity) x 100
• (500,000 / 2,500,0000) x 100
• 0.2 x 100
• ROE = 20%

If the business owner already knows how to calculate profitability and return, the next step is to analyze both together.

In addition to profitability and profitability, your company needs to have sustainable finances. Are you familiar with this concept?

Profitability and profitability analysis

After carrying out the calculations, you need to keep something in mind: profitability and profitability indicators do not work separately.

So, in our example, the company is profitable and profitable. However, if a person were to look only at the ROE ratio, they might have a distorted idea of ​​its profitability.

Therefore, always analyze all indexes.

So, when you are doing the profitability and return analysis, you can never take into account just one of these values.

For this reason, carrying out a monthly survey of profitability and return indicators is an idea that can prevent your company from being surprised by cash flow difficulties.

One way to improve both the profitability and profitability of a business is through good cost management.