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Profitability of Their Funds
To prove that a company has a growth situation and to know about their sales and benefits figures and of their management capacity, you should have a look to the profitability of their own funds. The formula to use to calculate it is the following:
Profitability of their own funds = sales x assets x benefits Assets own funds sales
= Assets rotation x financial leverage x benefit margin
To know about the consistence of the profitability of their own funds you have to consider each one of the elements of the former equation, the three elements are: the assets rotation, the financial leverage and the net benefit margin. This clearly takes us to the deduction that the figure can be bettered by managing more efficiently the assets (making it rotate faster), modifying the structure of liabilities (increasing the proportion of funds of others), and finally, by increasing the benefit margin (increasing the productivity or changing the spectrum of products).
Determining the significance of each of these factors when calculating the profitability of the company’s own funds, you will be prepared to answer a series of questions, such as:
From where does the growth come: the assets position, the financial leverage or have the benefit margin? How good is the profitability of the company’s own funds in comparison with that of other companies that operate in the same sector? Will the company maintain in the future this growth dynamics? What measures should the company take to better the profitability of their own funds?
Due to the importance that this figure has to determine the true nature of a growth situation, we will put an example to show you how to calculate it. The values that intervene in the profitability formula are the following:
Sales = 200
Assets = 200
Own funds = 80
Benefits = 10
Gives us the profitability off the own resources from the company we are analyzing:
Profitability of their own funds = 200 x 200 x 10 = 10
200 80 200 80
= 1 x 2.5 x 0.5 = 0.125 or 12.5%
Once profitability of the own funds is calculated, your next question will be that in which way will this index help you to make an investment decision. Well, this index indicates how much profit is the company getting in relation to their own funds (capital) that they dispose of.
For a society (and the shares it represents) to be considered in a growth situation, its own funds must have a high profitability in comparison to other companies, and the evolution line of this figure has to be stable and growing.