Return on working capital: coefficient, formula, analysis

2024 Author: Henry Conors | [email protected]. Last modified: 2024-02-12 02:43

The management of any company is obliged to monitor the performance indicators of the organization of financial and economic activities. The net profit of the enterprise, its stability depends on this. An important stage in assessing the effectiveness of its work is the profitability of working capital. This indicator is necessarily investigated by analysts.

Based on the data obtained, measures are developed to improve the financial and economic situation at the enterprise. Working capital is involved in the production of goods. Therefore, without their evaluation, the company cannot organize the process of manufacturing its products correctly. The profitability indicator allows analysts and company management to consider the impact of current assets on the profit of the reporting period.

The concept of working capital

Working capital of an enterprise consists of resources that are completely consumed in one cycle. They are included in the cost. Their turnover period is short-term (does not exceed 12 months). Such assets include raw materials, materials, semi-finished products, fuel, as well asreceivables and short-term investments. Their number is subject to rationing.

The profitability of working capital will be the greater, the less resources the company spends to increase profits. However, the number of such assets should be sufficient to ensure continuous production activities.

Therefore, the financial service is working to reduce the current assets of receivables, work in progress, stocks. In order to develop the right measures to improve the profitability indicator, it is necessary to conduct a comprehensive in-depth analysis.

The concept of profitability

Indicators of profitability in financial and economic analysis allow you to evaluate the effectiveness of the use of certain resources, their impact on profits. Indeed, in order to obtain a positive financial result in the reporting period, production must be organized in such a way that funds are sent into circulation economically.

But, in turn, the lack of resources leads to failures, production downtime. It also negatively affects profits. The indicator of profitability of working capital reflects the effectiveness of their use in the manufacturing process. When conducting an analysis, this coefficient should be considered in dynamics over several periods. It is also possible to compare it with similar indicators of competing enterprises.

Calculation formula

Return on working capital, the formula of whichused in financial analysis, quite simple. To understand how to interpret the result obtained during the study, it is necessary to understand the essence of this calculation. The formula for return on working capital is:

- Gross=NP / OS100, where NP is net profit, OS is the average annual amount of working capital.

The data for the calculation are presented in the form No. 1 and 2 of the financial statements. Working capital is line 1200 of the balance sheet. Net income is shown in line 2400 of G&I.

If during the analysis it was found that the profitability is greater than 0, then the use of current assets is effective. The company makes a profit through its activities. A negative result indicates an incorrect organization of production. Resources are used inefficiently.

Calculation example

Return on working capital, the formula of which was discussed above, is studied in dynamics. The result of the calculation is presented as a coefficient or percentage. The second option is preferable. For a correct analysis of this indicator, the calculation should be considered using an example.

Let's assume that in the previous period the average annual value of current assets on the balance sheet amounted to 10 million rubles, and in the reporting year - 12.5 million rubles. At the same time, the company received a net profit of 2.5 million rubles. both in the past and in the current period. Profitability is calculated using the above formula:

- Ros1=2, 5 / 10100=25%.

- Ros2=2.5 / 12.5100=20%.

In the analyzed period, the indicator was positive. But the dynamics speaks of a decrease in profitability. The increase in the number of current assets was the reason for this. Therefore, the governing bodies of the company should consider the structure of the balance sheet and determine the factors constraining development. Measures should be aimed at reducing the number of current assets.

Normative

In addition to considering the dynamics of the indicator, it should be compared with the normative value. It's different for every industry. This is due to the material intensity of production. In industry, it is high. Indeed, the manufacture of new products requires significant costs of raw materials, energy, etc. The profitability ratio of working capital in this case rarely exceeds 0.2.

For new enterprises, the zero value of the indicator is considered acceptable. But for trading companies, depending on the specifics of the activity, it is considered the norm if the coefficient is in the range from 0 to 0.8. In this case, the system of settlements with debtors mainly has an influence. At the same time, material costs are minimal, so they do not have a big impact on profitability.

Asset turnover

Working capital is the company's most liquid resources. Therefore, their number should be sufficient for timely settlement with creditors. But at the same time, movable property should not accumulate and settle in stocks, receivables. Therefore, the speed of one revolution playsimportant role.

This is the time during which a certain article or the entire set of current assets go through all stages of production, turns into a monetary form.

This indicator also affects profitability. The faster the turnover, the more profit the company receives. Therefore, the governing bodies are interested in every possible way to contribute to the improvement of this indicator.

Profitability and turnover

The profitability of fixed working capital depends on the speed of turnover. To understand this relationship, you should consider the formula for calculating this indicator. She looks like this:

- Ros \u003d PPKob, where: PP is the profitability of sales, Kob is the turnover ratio of current assets.

The turnover rate is calculated by the formula:

- Cob=BP / OS, where BP is sales revenue.

Return on sales means the ratio of sales proceeds to the cost of goods or services. This ratio characterizes the efficiency of the company's operations as a whole.

Break-even calculation

By analyzing the profitability of working capital, they receive a whole set of data on the organization of the company's financial and economic activities. Based on them, planning is carried out.

Initially, you need to calculate the breakeven level. This is the line that separates the profitability of the enterprise from its unprofitability. At this point, the resources spent onreceipt of net profit, become equal to it. The company does not receive any profit or loss.

When considering the financial statements, the break-even point is determined upon receipt of net profit in the amount of 0 rubles. This allows you to plan the minimum required income from sales, at which production will break even. From here, the minimum amount of costs (including working capital) is calculated.

Factors influencing profitability

Return on working capital is influenced by many factors. They can be external and internal. To determine the profitability of working capital in the planning period, the company's management must take them into account.

It is impossible to influence external factors, but it is possible to foresee their change. These include the cost of raw materials, labor and fuel, seasonal fluctuations in demand, and prices of competitive products. Inflation is also among the external factors on which profitability depends.

Internal paths of influence are available to management. Therefore, when planning measures to improve the efficiency of the enterprise, they are given special attention. Internal factors include labor productivity, organization of the production process, management approaches, etc.

Thanks to the competent, thoughtful principles of the company's operating activities, it is possible to increase profits and reduce costs.

Ways to increase profitability

There are three main areas that allow you to increase the profitability of working capital. Baseda comprehensive analysis of the company's activities, decisions are made on the implementation of certain measures to improve production efficiency. These include accelerated sales, deliberate reduction in working capital, changes in product prices.

Under the acceleration of trade should be understood as a reduction in the period of the entire cycle. By examining each of its stages, it is possible to determine the limiting factors. By eliminating them, the company is able to accelerate the turnover of funds. This releases certain resources that can be used to improve product quality and expand production.

Reducing the number of current assets should be clearly calculated. Lack of funds leads to production downtime, reduced solvency, investment rating and stability. All actions in this direction must be clearly calculated. Price changes should be made taking into account market conditions.

Measures to improve profitability

There are a number of key measures that can be taken to improve the efficiency of the use of working capital. To shorten the turnaround time for materials to cash, a company can focus on those items that are in high demand.

It will also be advisable to increase the range, reduce stocks in the warehouse, and work to improve product quality. An important role is played by a competent advertising campaign.

Profitability of working capital increases with proper rationing. The introduction of materials with improvedqualities, scientific development is also of great importance.

Changes in prices also have a huge impact on profits. At a constant cost, the rise in price of goods or services will be appropriate in the absence of competition. If the market is filled with various substitutes and similar products, it is necessary either to reduce the cost (not at the expense of quality), or to reduce prices as much as possible.

Familiarity with such an indicator as the profitability of working capital allows for a competent assessment of the effectiveness of production resources. Based on the results of the study, planning is carried out, ways to improve the organization of turnover are found. This leads to the rational use of resources, an increase in the company's net profit.