One important aspect of performance evaluationThe firm is studying its effectiveness in terms of ownership. Efficiency in this case, as in many others, can be assessed by determining the profitability index. However, a simple calculation may not be enough and it will be necessary to supplement it with analysis. The most popular method is, perhaps, a factor analysis of the return on equity. Let us dwell in more detail on the methodology of its implementation and the main features.
Factor analysis of the profitability of its owncapital is usually associated with DuPont formulas that allow you to quickly make all the necessary calculations. It is important to understand how these formulas turned out, moreover, there is nothing complicated about it. The profitability of the owner’s capital is obviously determined by the ratio of the net profit to the value of this capital. The factor model is obtained from this relationship by elementary transformations. Their essence lies in multiplying the numerator and denominator by revenue and assets. After that, it is easy to see that the efficiency of use of this part of capital, its profitability, is determined by the product of the financial dependence index on the turnover of property (assets) and the level of sales profitability. After the compilation of the mathematical model, its analysis is performed directly. It can be carried out in any way suitable for deterministic models. Factor analysis of the return on equity using DuPont formulas is one of the variations of the method of absolute differences. He, in turn, is also a special case of the method of chain substitutions. The basic principle of this method lies in the sequential determination of the effects of each factor in isolation, regardless of the others.
It is worth noting that in a similar way spendand factor analysis of economic profitability. It represents the ratio of profit to assets. After small transformations, this indicator can be represented as the product of the turnover of property of the company on the profitability of sales. The subsequent analysis proceeds in the same way.
It is necessary to pay special attention to whatindicators should be used in calculations. Obviously, it is necessary to use the information for at least two periods in order to be able to observe the changes. The data that are taken from the income statement are cumulative, as they represent a certain value for a given period. In the balance, the data are presented on a specific date, so it is best to calculate their average value.
Указанные выше методы, то есть способ цепных substitutions and its modifications can be used to analyze almost any deterministic factor model. For example, factor analysis of the current liquidity ratio can be carried out very simply. For more detail, it is advisable to disclose the formula for this ratio, reflecting the components of current assets in the numerator, and short-term liabilities in the denominator. Then it is required to calculate the effect of each of the identified factors. It should be noted that absolute differences and the method of the same name cannot be used for this model, since it has a multiple character.
The value of any kind of analysis is difficult to overestimate.A factor analysis of the return on equity and other indicators is one of the best methods to facilitate the adoption of correct management decisions. Identifying the strong negative impact of a particular factor clearly indicates where the impact should be directed. On the other hand, a positive impact may indicate, for example, the presence of certain reserves of profit growth.
