Yield index: formula

Today we will figure out what analytical tools will help determine how profitable cash investments are - let's talk about the index of profitability (or profitability) of investments: find out what it is, how and by what formula to calculate it. First, let's turn to the theory, and then check how everything works on specific examples.

First, let's define what investment is. It is an investment in business. At the same time, the contribution itself does not have to be material: the transfer of technology, copyrights and other intellectual property also belong to them. The main goal of any investment is to make a profit. Simple analytical tools will help you evaluate their effectiveness and estimate the future benefits of cooperation with a particular company. These include the index of profitability (profitability, profitability) of investments - this is a characteristic that reflects the amount of income that the sponsor receives for each ruble, dollar or euro invested. Roughly speaking, this is the amount of profit divided by the total investment. I use it to calculate the effectiveness of investments in a particular company, and to choose the most suitable option from those available on the market.

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The formula for the index of profitability (yield) of investments

B i – net financial profit of the i-th year
n is the term of the investment agreement in years
I 0 – basic investment, first payment and so on
r - discount rate

The formula is easily simplified - in a particular case, it will take the following form:

NPV - current value of the company
PV is the total financial profit of the project
I 0 - initial investment

If you invest money not just once, but several times, then the formula becomes more complicated:

The index of profitability (yield, profitability) is, as we have already said, an indicator of the amount of profit per unit of investment. It reflects how much money you will receive from each ruble, dollar or euro invested. And the higher this figure, the better for you. An index value below one is a signal that your investment is making a loss, not a profit. If the indicator is equal to one, then the money "works to zero."

The Return on Investment Index (PI) will help you calculate the effectiveness of investments at each stage:

Assess the potential of a deal before concluding a contract.
Track the dynamics of growth or reduction in profits.
Calculate how much money the cooperation brought after the completion of the project and the withdrawal of investments.

This indicator is also used to form an investment portfolio. With its help, it is easier to estimate how much income will be brought by different companies with a similar current value (NPV) or to choose a combination of projects so that their total cost is maximum.

The main drawback of the return on investment index is its dependence on the scale of the project. It is necessary to compare projects with approximately equal NPV, otherwise the PI value will not reflect the real picture.

How to calculate the yield index: an example

Let's try to open a store. We need 100,000 rubles and five years. The rate of return in this case is 10%. After the required time has passed, we get the following table:

We analyze the received data and obtain the following value of the return on investment index:

PI = 72074 100000 = 0.72

As can be seen from the calculation, our abstract store is not doing very well - the PI value is less than one and the project has lost a lot of value.

Discounted yield index

Another indicator that helps to analyze the return on investment. Its formula looks like this:

PV - total income
IC - investments in the first stage

This is a special case - here the funds are invested at a time. In general, the equation looks like this:

PVi is the total profit of the project for period i
ICi is the volume of investments in period i
r - discount rate
n is the number of iterations (how many times you invested)

The main disadvantage of the method is that it is impossible to compare financial flows relating to different periods. In this case, the results will not be objective.

Example:

The volume of investments is 100,000 rubles
Investment income in the 1st year: 30,000 rubles
2nd year: 41,000 rubles;
3rd year: 43,000 rubles;
4th year: 38,000 rubles;
The barrier rate is 10%.

We count income:

PV1 = 30000 / (1 + 0.01) = 29,703
PV2 = 41000 / (1 + 0.01) = 40,594
PV3 = 43000 / (1 + 0.01) = 42,574
PV4 = 38000 / (1 + 0.01) = 37,623
DPI \u003d (29703 + 40,594 + 42,574 + 37,623) / 100,000 \u003d 1.50 - the profitability of the project is excellent.

Discounted profitability index calculations take into account either all capital investments for a certain period, or investments immediately before the start of the project. In these cases, the DPI will take on different values.

Physical volume index

This indicator reflects the dynamics of investor activity and belongs to macroeconomic ones. In this case, the influence of prices is not taken into account. It is needed to analyze the market or the activities of a particular enterprise: if the trend is such that sponsors are less and less willing to invest in a particular business, this is a signal that the enterprise is operating inefficiently. The physical volume index formula looks like this:

K main. 1 - the volume of current investments in current prices;
K main. 0 - the volume of investments in the base period in the current prices at that time
I c - the ratio of prices in the current period to the base, in percent.

The volume index can be calculated for all investments as a whole, and for individual components (costs for consumables, services, and so on). For the convenience of calculations, special coefficients are used, calculated from producer prices. They help to bring the cost of investments to the base.

Conclusion

We found out how to calculate the index of profitability (yield, profitability) of investments and what other tools will help evaluate the prospect of investing money in a particular business. These are quite simple methods of financial and economic analysis, which can not always give an objective idea of the situation. To get a complete picture and take into account all the factors, you need to apply more complex tools. But if your goal is simply to evaluate the potential of a trade, then calculating the profitability index is fine.