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Financial management. The Formula You Need: Return on Equity to Help Investors Equity and Investors

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The above data show that the growth rate of equity capital in 2011 is lower than that of 2010 due to a slowdown in capital turnover, a decrease in the capital multiplier and (mainly) due to a decrease in the share of capitalized profits.

Thus, a study of the movement of equity capital showed that it is necessary to increase the capitalization (reinvestment) of profits, because it helps to increase financial stability, reducing the cost of capital. This conclusion is especially relevant due to the fact that the main share of equity capital is retained earnings.

2.4 Analysis of financial ratios

The task of analyzing financial ratios is to determine how independent the organization is from financial point vision, whether the level of this independence is increasing or decreasing and whether the state of his own corresponds. Financial ratios that characterize the independence of an enterprise make it possible to measure whether the analyzed organization is financially stable enough.

Thus, the financial condition of an enterprise is determined by its financial stability.

Economic essence The financial stability of an enterprise lies in the provision of its reserves and costs with the sources of their formation, i.e. The financial stability of an enterprise implies financing from its own funds.

To analyze financial stability, it is necessary to calculate such an indicator as your own working capital(formula 1.2.8):

SOK 2010 = 470685-273393=197292 thousand rubles,

SOK 2011 = 584000-245261=338739 thousand rubles.

Calculation of coefficients characterizing the financial stability of OJSC "Vesenny" for the period 2010-2011. produced on the basis of formulas (1.2.9-1.2.13) and presented in table 2.4.1.

Table 2.4.1

Calculation of coefficients characterizing the financial stability of OJSC "Vesenny" for the period 2010-2011.

Coefficient	Absolute change	Including due to
		Own capital	Borrowed funds	Non-current assets	Current assets	Balance currency	Long-term obligations
Coverage ratio of inventories and costs with own sources of financing
Equity concentration ratio (autonomy ratio)
Financial dependency ratio
Equity agility ratio
Coefficient	Absolute change	Including due to
		Own capital	Borrowed funds	Non-current assets	Current assets	Balance currency	Long-term obligations
Investment ratio (own sources)
Capitalization ratio (leverage)
Availability ratio of own sources of financing
Funding ratio
Financial stability ratio

The main indicator in the analysis financial condition is the coefficient of provision of inventories and costs with own sources of financing. The higher the value of this indicator, the more stable the financial condition of the organization. In 2010, Koz = 0.991, this means that the enterprise’s balance of payments is disrupted, but it remains possible to restore balance by attracting temporarily free sources, for example, a reserve fund. In 2011 Goats = 1.41. This indicates the absolutely stable financial condition of the organization, because stocks less than the amount own working capital and covered by stable sources of financing. In parallel with the growth of this ratio, the amount of own sources of financing also increased.

The autonomy coefficient is low, but in 2011 this coefficient increased, which indicates an increase in financial stability.

The financial dependence ratio is the inverse of the equity capital concentration ratio. This indicator indicates that in 2010 for every 1 rub. owners' funds account for 0.4 rubles. borrowed funds, and in 2011 - 0.3 rubles. The decrease in this indicator is a positive trend.

The equity agility ratio determines how much of equity capital is used in current operations and how much is capitalized. The standard value is 0.4 - 0.6. The coefficient of maneuverability of equity capital of OJSC "Vesenny" is within the normal range, which positively characterizes the enterprise. There is no need to increase this ratio in the future.

Based on the investment ratio of own sources and long-term loans, it can be determined that own sources and long-term loans form the enterprise’s investments in 2010 by 218.9%, in 2011 - by 291.8%. These are excellent indicators for this organization, because... from them we can conclude that the company is effectively investing its financial resources.

The financial stability coefficient is additionally assessed through a system of indicators characterizing the structure of the capital used by the enterprise from the standpoint of the degree of financial stability of its development in the coming period. As the data in Table 2.4.1 shows. The dynamics of the capitalization ratio indicates sufficient financial stability of Vesenniy OJSC, since this requires that this ratio be no more than 1.5. The value of this indicator is influenced the following factors: high turnover, stable demand for products sold, well-established supply and sales channels, low level of fixed costs.

The ratio of provision with its own sources of financing in the case under study is above 50%, which indicates the independence of OJSC “Vesenny” from borrowed sources of funds in the formation of its current assets.

The value of the financing ratio during the study period is more than 0.7, which is a positive indicator. The majority of all financing is provided from our own funds.

Thus, the values of financial stability indicators, determined by the structure of its own sources of financing, affecting the financial condition of the enterprise, are within the recommended limits, but an analysis of the dynamics indicates a deterioration in some of them (the capitalization ratio decreased by 17.47% and the financial stability ratio decreased by 9 ,9%). The assessment of the financial condition of the enterprise in this case is “good”. This assessment classifies the financial condition of Vesenniy OJSC as second class - this is an organization with a normal financial condition, its financial indicators in general, they are very close to optimal, but some lags are allowed for individual coefficients. This organization is profitable, but there are changes in the structure of its own sources of financing.

2.5 Analysis of the efficiency of using equity capital

To analyze the efficiency of using equity capital, coefficients are used business activity and profitability. The dynamics of business activity coefficients were analyzed using formulas (1.2.19-1.2.20), which are presented in Table 2.5.1.

Table 2.5.1

Business activity ratios

The ratio shows the activity of funds at risk to shareholders. There was a decrease in capital turnover, which reflects the tendency towards inactivity of part of equity capital.

The turnover of equity capital in days means that, other things being equal, Vesenniy OJSC requires less working capital. A decrease in this indicator indicates that the circulation occurs faster, i.e. in 2011, equity capital began to be used more efficiently.

An important characteristic of the efficiency of equity capital is its profitability, calculated using formula 1.2.21. The calculation results are presented in Table 2.5.2.

Table 2.5.2

Return on equity indicators

The data in Table 2.5.2 indicates a slight decrease in return on equity. It should be noted that this indicator is quite high, i.e. The profitability of the business for its owners is obvious, and for 1 ruble of equity capital there is about 70 kopecks of profit.

Using the DuPont model (factor model for determining return on equity - formula 1.2.24), factors influencing return on equity are identified. For factor analysis changes in return on equity are compiled in Table 2.5.3.

Table 2.5.3

Input data for factor analysis of return on equity

According to the DuPont model, return on equity decreased over the period 2010-2011. The calculation was made using the chain substitution method and is presented in summary table 2.5.4.

Table 2.5.4

Factors of change in return on equity for 2010-2011, %

The final data of the factor analysis of changes in return on equity are presented in summary table 2.5.5.

equity financial analysis

Table 2.5.5

Factor analysis of changes in return on equity for the period 2010-2011, %

Thus, return on equity decreased due to the increase in assets. According to the balance sheet, in 2011 there was an increase in inventories and receivables.

The next indicator is the payback period, it shows the number of years during which investments in this organization. Dynamics of the payback period of equity capital for 2010-2011. presented in table 2.5.6.

Table 2.5.6

Indicators of the payback period of equity capital

The data in Table 2.5.4 shows that the return on equity in 2010 was 1.43 years (1 year 5 months), and in 2011 - 1.45 years (1 year 5.5 months). There was an increase in the payback period of equity capital, which indicates insufficient efficiency of its use.

Thus, the efficiency of using equity capital is at a fairly high level, but this indicator is decreasing due to an increase in assets, an increase in the payback period of equity capital and a decrease in business activity.

The basis for managing an enterprise’s own capital is managing the formation of its own financial resources. In order to ensure effective management of this process at the enterprise, it is necessary to develop financial policy aimed at attracting its own financial resources from various sources in accordance with the development needs of the enterprise in the coming period. The policy should be aimed at achieving a return on equity of at least 70%.

The equity capital management policy is part of the overall financial strategy of the enterprise, which consists in ensuring the necessary level of self-financing of its production development.

The following can be proposed as measures to improve the use of an enterprise’s own capital:

fuller use production capacity enterprises, improving the quality and competitiveness of products, reducing their costs, rational use of material, labor and financial resources, reducing non-production costs and losses;

improving the organization of logistics in order to uninterruptedly provide production with the necessary material resources and reducing the time spent by capital in inventories;

reduce the value of assets by reducing inventories and receivables;

introduction effective system mutual settlements in order to minimize financial diversion of funds into accounts receivable.

The enterprise must pay great attention to the introduction of new, more advanced technologies production with a reduction in human labor.

Thus, the implementation of measures to introduce new technological processes production allows you to increase the efficiency of using equity capital in the enterprise, in particular, indicators of the payback period and return on equity capital.

3.2 Forecasting efficiency indicators for the use of equity capital

To forecast the efficiency indicators of equity capital of Vesenniy OJSC for 2010, it is necessary to find the forecast ratios of equity capital turnover and return on equity, as well as draw up a forecast profit and loss report.

To calculate forecast performance indicators, it is necessary to perform a series of actions consisting of the following steps:

1) Calculation of the projected value of revenue from sales of products and the value of the projected net profit;

2) Construction of a forecast profit and loss report and forecast balance sheet based on forecast values of revenue from product sales and net profit;

3) Calculation of forecast values of turnover ratios and return on equity capital based on forecast reporting forms and their comparison with 2011 indicators.

To calculate the forecast value of revenue from product sales, the exponential smoothing technique is used taking into account the trend. Table 3.2.1 presents the initial data for forecasting the revenue of Vesenniy OJSC.

Table 3.2.1

Initial data for forecasting the production output of Vesenniy OJSC by months of 2010-2011. in thousand rubles











September			September

Based on Table 3.2.1, a graph is constructed to find the regression equation:

Figure 3.2.1. Graph of constructing the regression equation of JSC "Vesenny" for the period 2010-2011, thousand rubles.

Thus, we obtain the regression equation y=22.584x+123090, as a result we obtain a smoothed trend value for a period of 1 month b=22.584. Further, based on table 3.2.1. and based on the obtained value of b, we make a table for calculating projected revenue from product sales for 2010. For values A and B, values equal to 0.1 and 0.3 were selected, respectively.

Table 3.2.2

Calculation of forecast revenue from sales of products of OJSC "Vesenny" for 2010 in thousand rubles.

Table 3.2.3

Forecast values of revenue from sales of products of OJSC "Vesenny" for 2010 in thousand rubles.











September

Thus, based on the exponential smoothing technique, taking into account the trend, the forecast value of the revenue of OJSC “Vesenny” for the 2010 forecast year was obtained in the amount of 1,477,299 thousand rubles.

The next stage of the study is to determine the correlation-regression dependence of net profit on revenue from product sales (Table 3.2.4).

Table 3.2.4

The initial data are given for the correlation between net profit and revenue from product sales for 2010-2011. by month in thousand rubles.

	Net profit(y)	Revenue from product sales (x)

Graphs of the dependence of profit values on revenue, obtained on the basis of correlation and regression analysis of Vesenniy OJSC, are presented in the appendix. Using various methods of finding the regression equation we will find best option equations where R2 tends to 1.

Table 3.2.5

Results of calculations of correlation-regression dependence

According to Table 3.2.5, it can be seen that the linear, power and polynomial methods will equally accurately predict the net profit of revenue from product sales for 2010.

Table 3.2.6

Analysis of projected net profit values for 2010. in thousand rubles

	Net profit








September


	Net profit

Thus, using the linear method, 114,151.2 thousand rubles were received. net profit.

Let's carry out comparative analysis coefficients of business activity and return on equity of OJSC “Vesenny” (Table 3.2.7).

Table 3.2.7

Comparative analysis of business activity and return on equity for 2010-2011.

Based on table 3.2.7 and formula 1.2.19, we will predict the predicted value of equity capital (SC).

SK=V/OKAP=1477299/2.2.85=518350.5 thousand rubles.

Let's compile a table with the calculation of forecast values of business activity coefficients and return on equity capital, characterizing its efficiency, based on forecast reporting forms and comparing them with indicators for 2011 (Table 3.2.8).

Table 3.2.8

Forecast values of the efficiency of equity capital of OJSC "Vesenny" for 2011 and the 2010 forecast year

Indicator	Growth rate, %	2010 forecast	Growth rate, %

1. Sales revenue, thousand rubles.
2.Net profit, thousand rubles.
3. equity capital, thousand rubles.
4.Turnover of equity capital in turnover
5.Turnover of equity capital in days
6.Return on equity, %

Analyzing the table with these indicators, we can draw the following conclusions: sales revenue will decrease by 2.2%, although in 2010-2011 there was an increase of 4.2%. Revenue and equity will also decline by 2% and 11%, respectively. These facts characterize negative dynamics.

The equity turnover ratio shows the activity of funds at risk to shareholders. There will be an increase in OKAP, which is a positive characteristic.

An important characteristic of the efficiency of equity capital is its profitability. This indicator is predicted to decrease, which determines the need to improve the equity capital management system of Vesenniy OJSC.

Conclusion

The basis of the enterprise's own capital is the authorized capital, fixed in its authorized constituent documents. In addition, as part of own sources of funds there are such important structural units as additional and reserve capital, retained earnings and other reserves, the funds of which are placed in specific property that constitutes non-current and current assets.

An enterprise that uses only its own capital for its development has the highest financial stability, but limits the pace of its development (since it cannot ensure the formation of the necessary additional volume of assets during periods of favorable market conditions) and does not use financial possibilities increase in profit on invested capital.

IN general view equity analysis methodology includes research financial statements, during which a structural analysis of both the overall value of equity capital and an assessment of each of its elements is carried out. The magnitude and dynamics of changes in the indicator are being studied net assets on current moment time. Next, a search is made for reserves to increase (gain) equity capital. In order to make informed economic and managerial decisions aimed at increasing equity capital, it is necessary to know the main reserves for such growth and ways to implement them.

Analysis of technical and economic indicators made it possible to determine that the level of condition of Vesenniy OJSC corresponds to a dynamically developing enterprise with an optimal level of profitability.

Basically, all the work of the enterprise at its own expense is based on the profit received. Considering that the amount of profit of an enterprise in future periods is influenced by numerous factors both within the enterprise and factors external environment, then if the enterprise continues its existing strategy for managing its own capital in the coming periods, it may lead to the fact that in case of unfavorable market conditions funds may not be enough even to maintain current activities.

A study of the movement of equity capital showed that it is necessary to increase the capitalization (reinvestment) of profits, because it helps to increase financial stability and reduce the cost of capital. This conclusion is especially relevant due to the fact that the main share of equity capital is retained earnings.

The efficiency of using equity capital is at a fairly high level, but this indicator is decreasing due to an increase in assets, an increase in the payback period of equity capital and a decrease in business activity.

The introduction of measures to put into operation new technological production processes makes it possible to increase the efficiency of using equity capital at the enterprise, in particular, indicators of the payback period and return on equity capital.

If the forecast for 2010 is met, the factor of overestimation of the amount of assets, which had a negative effect on the return on equity, will be neutralized.

List of sources and literature used

1. Civil code Russian Federation: [federal. law: adopted by the State. Duma October 21, 1994: accessed March 15, 2007]. - Novosibirsk: Sib. Univ. publishing house, 2010. - 102 p.

2. Tax Code of the Russian Federation: [federal. law: adopted by the State. Duma July 31, 1998: accessed September 2, 2010]. - M.: Yurayt Publishing House, 2010. - 745 p.

3. Federal law Russian Federation “On companies with limited liability» dated 02/08/98 No. 14-FZ (with subsequent amendments and additions).

4. Order of the Ministry of Finance of the Russian Federation dated July 22, 2010 No. 67n “On forms financial statements organizations" (with subsequent amendments and additions).

5. Profit and loss statement of OJSC “Vesenny” for the period 2010-2011.

6. Balance sheet of OJSC “Vesenny” for the period 2010-2011.

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18. Kiseleva, G.V. Financial accounting: Textbook / G.V. Kiseleva, L.V. Usatova. - M.: Dashkov and K, 2010. - 522 p.

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20. Korneeva, T.A. The theory of accounting in diagrams and tables: Textbook / T.A. Korneeva, G.A. Shatunova. - M.: Eksmo, 2010. - 240 p.

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Appendix 1

Rice. 1. Equation of correlation-regression dependence of net profit on revenue - linear type of trend

Rice. 2. Equation of correlation-regression dependence of net profit on revenue - polynomial type of trend

Rice. 3. Equation of correlation-regression dependence of net profit on revenue - logarithmic type of trend

Rice. 4. Equation of correlation-regression dependence of net profit on revenue - power type of trend

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Own capital and investors

Own capital means financial resources company owner, shareholders and investors. The last group is represented by people or companies that invest their funds in business development in third-party companies. It is important for them to know that their investments are profitable. Depends on it further cooperation and development of the company in the market.

Every company needs financial investments - both internal and external. And the situation is much more favorable when these funds are represented not by bank loans, but by investments from sponsors or owners.

How to understand whether it is worth continuing to invest in a particular company? Very simple. You just need to calculate your net worth. The formula is easy to use and transparent. It can be used for any organization based on balance sheet data.

Calculation of the indicator

What does the formula look like? Return on equity is calculated using the following calculation:

Rsk = PE/SK, where:

Rsk - return on capital.

SK is the company's own capital.

PE is the net profit of the enterprise.

The return on equity is most often calculated over a year. And all the necessary values are taken for the same period. The result obtained gives a complete picture of the enterprise’s activities and the profitability of equity capital.

Do not forget that not only but also borrowed funds can be invested in any company. In this case, return on equity, the calculation formula for which is given above, gives objective assessment about the profit from each unit of money invested by investors.

If necessary, the profitability formula can be changed to obtain the result as a percentage. In this case, it is enough to multiply the resulting quotient by 100.

If you need to calculate an indicator for a different period (for example, less than a year), then a different formula is needed. Return on equity in such cases is calculated as follows:

Rsk = PE * (365 / Period in days) / ((SKnp + SKkp) / 2), where

SKnp and SKkp are equity capital at the beginning and end of the period, respectively.

Everything is known by comparison

In order for investors or owners to fully assess the profitability of their investments, it is necessary to compare it with a similar indicator that could be obtained by financing another company. If the effectiveness of the proposed investment is higher than the actual one, then it may be worth switching to other companies that require investment.

The formula developed to calculate the standard value can also be used. Return on equity in this case is calculated using the average rate on bank deposits for the period (CD) and on income tax (SNP):

Krnk = Sd * (1-Snp).

When comparing the two indicators, it will immediately become clear how well the company is doing. But for a complete picture, it is necessary to analyze the efficiency of equity capital over several years so that temporary or permanent decline in profitability can be more accurately determined.

It is also necessary to take into account the degree of development of the company. If at the end of the period some innovations were introduced (for example, replacing equipment with more modern ones), then it is quite natural that there would be a slight decrease in profits. But in this case, profitability will certainly return to its previous level - and, possibly, become higher - in the shortest possible time.

About the norms

Each indicator has its own standard, including the efficiency of equity capital. If you focus on (for example, England and the USA), then the profitability should be in the range of 10-12%. For developing countries whose economies are subject to inflation, this percentage should be much higher.

You need to know that you should not always rely on return on equity, the formula for calculating which is presented at the beginning. The value may be overestimated, since the indicator is influenced by others financial leverage. One of them is the value For such cases, there is a value that allows you to more accurately calculate profitability and the influence of certain factors on it.

In the end

Every owner and investor should be aware of the formula discussed. Return on equity is a good assistant in any line of business. It is the calculations that will tell you when and where to invest your funds, as well as the right moment to withdraw them. This is very important information in the investment world.

For owners and managers, this indicator gives a clear picture of the direction of activity. The results obtained can suggest exactly how to continue running the business: along the same path or change it radically. And making such decisions will ensure increased profits and greater stability in the market.

most often measured in years. The indicator can also be displayed in days, weeks, months, quarters, etc.

Explanation of the indicator

The payback period of equity capital is the most important ratio for owners. The indicator value reflects the period during which their capital will be repaid. This means that the use of equity capital will generate net profit, which is equal to its current amount. The indicator is calculated as the ratio of the average annual amount of equity capital to the amount of net profit for the year.

Standard value:

The normative value depends entirely on the owners' considerations about the efficiency of using their capital. If the company is commercial organization and the owners created it to generate profit, then the quality of the use of equity capital can be determined by comparing the current payback with the payback of alternative areas of investment. The simplest way is to compare the return on equity in the business entity under study and the return on investment in various financial instruments (deposit deposit, diversified portfolio of shares, etc.). If the return on equity capital is significantly lower than the values for alternative directions, then it is unsatisfactory.

Certainly, negative value indicator is unacceptable and indicates a decrease in the well-being of owners.

When analyzing, it is necessary to consider the indicator in dynamics, because a stable decrease in payback will indicate a constant increase in the efficiency of the company.

Directions for solving the problem of finding an indicator outside the standard limits

As is the case with other profitability indicators, payback is formed under the influence of absolutely all areas of the company’s activities. Based on the calculation formula, the payback can be reduced by increasing the efficiency of the use of financial resources, which will return part of the equity capital to the owners, or by ensuring an increase in net profit. To increase the latter, it is necessary to take measures to maximize income or reduce expenses.

Calculation formula:

Payback period of equity capital = Average annual cost of equity capital / Net profit (loss) (1)

Payback period of equity capital = 100/Return on equity (2)

Average annual cost of equity = Amount of equity at the beginning of the year/2 + Amount of equity at the end of the year/2 (3)

Calculation example:

Company OJSC "Web-Innovation-plus"

Unit of measurement: thousand rubles.

Payback period of equity capital (2016) = (1503 /2+1494 /2)/ 491 = 3.05 years.

Payback period of equity capital (2015) = (1494 /2+1403 /2)/ 473 = 3.06 years.

Thus, the operating efficiency of the company OJSC “Web-Innovation-plus” is high, and the return on equity capital is about 3.05 years. This is significantly higher than the return on investment of alternative tools. The return on investment in securities is currently low. Therefore, we believe that equity management is at the proper level.

Task

1. absolute liquidity ratio

2. capitalization ratio

3. Payback period of equity capital

4. Return on equity cash– 9,700 thousand rubles; short-term liabilities – 22,100 thousand rubles; long-term liabilities – 6,000 thousand rubles; capital and reserves - 39,000 thousand rubles; profit from ordinary activities – 19,600 thousand rubles.

Task

Based on the following data from the balance sheet of a construction organization, determine:

1. Sales profitability

2. Labor productivity

3. Return on assets

4. Accounts receivable turnover, profit from sales – 50,800 thousand rubles; cost - 120,000 thousand rubles; commercial expenses – 3,200 thousand rubles; administrative expenses– 4,000 thousand rubles; accounts receivable – 990 thousand rubles; sales revenue - 178,000 thousand rubles; fixed assets – 9,900 thousand rubles; s.s.h. – 37 people

Task

Based on the following data from the balance sheet of a construction organization, determine:

1. Financial stability ratio

2. Own working capital

3. Own and long-term borrowed funds

4. Turnover of equity capital, profit from sales – 98,500 thousand rubles; capital and reserves – 42,200 thousand rubles;

long-term liabilities – 2,100 thousand rubles; balance sheet currency – 43,500 thousand rubles; non-current assets– 28,800 thousand rubles.

Task

At the beginning of the reporting period, the value of the current liquidity ratio is 2.4; security ratio value own funds equals 0.6. At the end of the reporting period, the value of the current liquidity ratio is 1.9; the value of the equity ratio is 0.5. Based on these data, draw a conclusion about the state of the balance sheet structure at the beginning and end of the period and calculate the loss ratio or the solvency restoration ratio.

Task

Determine the type of financial stability of the enterprise based on the following data:

Own working capital(SOS) – 162,000 thousand rubles;

Own and long-term borrowed funds (SDZS) – 201,000 thousand rubles;

Main sources of formation of reserves and costs (IOC) – 319,000 thousand rubles;

Inventories and costs (ZiZ) – 274,900 thousand rubles.

Task

Using the financial statements data, sell part of the low-liquid assets taking into account the discount (inventories finished products and excess inventories)

Offer options for the rational use of funds received

Task

Using financial statements data, analyze accounts receivable and payable.

Collect part of the receivables through negotiations with each counterparty

Suggest options for the rational use of mobilized funds

Task

Carry out the procedure for a factoring operation or netting scheme (with calculations and description of the transaction)

Task

Carry out the sale of part of the unfinished construction (frozen or unprofitable objects)

Conduct a sale of short-term financial investments(including discount)

Task

Analyze the need for outsourcing (subcontracting)