2.Method of an assessment of profitability and risk of financial investments

2.1.Concept of profitability

As a rule, during implementation of investment activity the enterprise deals with several investment projects. Each project is characterized by the parameters. Therefore the enterprise should choose constantly optimum projects on the basis of in advance established criteria. The choice of selection criteria and justification of their values are based on investment strategy and policy of the enterprise. So, the aggressive investment policy assumes use as such criteria of higher values of risk and profit. The conservative investment policy allows application of criteria with low value of risk and profit. The moderate policy other things being equal results conditions in need of use of average values of the chosen indicators.

One of widespread selection criteria of investment projects - profitability.

Profitability - one of the main indicators of investments on which it is possible to estimate advantage of investments, their expediency and to compare them among themselves on this indicator. Often for an assessment of advantage of an investment of money use a sheaf risk profitability. The logic here is simple: in itself such indicators as profitability and risk are a little informative. What sense to invest money in tools with a high risk level and low potential profitability? If the risk of losses is great, and possible remuneration has to be at high level.

We will separate concepts of the income and profitability. The income is the absolute value expressed for example, in monetary units. While profitability - the relative size expressed as a percentage or annual interest rates.

Profitability shows, on how many percent the enclosed sum grew or the capital (and also how many percent of profit the asset made) increased. Profitability can be calculated both for all the time, and for a certain period (for example year).

Annual profitability - the important parameter in which investors can draw conclusions about appeal of this or that tool of investments. One of simple methods of an assessment of profitability and efficiency of the investment project is calculation of simple rate of return when the annual net profit shares on the total amount of investments. One of meanings of a similar assessment can call determination of terms of approximate payback of the investment project. It is also possible to mention such indicator as the period of payback of the project, pays off it by division of the sum of initial investments into a full revenue of the carried-out investments. This indicator is urged to show, how soon the money invested on the project to return and receipt of profit from already realized project will begin.

Typical zones "risk- profitability":

the least risky investments usually are the state bonds. Usually such investments are called "without risky", but nevertheless the system risk is inherent in them;

a little more risky are deposits, securities, etc. The probability of bankruptcy of the companies (including and banks) is much higher than probability of a default of the state;

and at last, the most risky are venture investments since mean investments in projects which with a high probability won't bring planned result. But in case of success, such projects pay off wholly.

In practice the economist in general and to the financier in particular very often should estimate overall performance of this or that system. Depending on features of this system the economic sense of efficiency can be invested with various formulas, but their sense always one is the relation of result to expenses. Thus the result is already received, and expenses are made.

Certainly, they are of a certain value for accounts department, characterize enterprise work for expired period, etc., but it is much more important for the manager in general and financial in particular to define overall performance of the enterprise in the future. And in this case the formula of efficiency needs to be corrected a little.

The matter is that we don't know 100% size of result received in the future, size of potential future expenses with reliability.

There is so-called "uncertainty" which we have to consider in our calculations, differently will simply receive the incorrect decision. As a rule, this problem arises in investment calculations at determination of efficiency of the investment project (IP) when the investor is compelled to define for himself to what risk he is ready to go to receive desirable result, thus the solution of this two-criteria task becomes complicated that tolerance of investors to risk is individual.

Therefore the criterion of adoption of investment decisions can be formulated as follows: The SP is considered effective if its profitability and risk are balanced in accepted for the participant of the project of a proportion, and formally to present in the form of expression (1):

Efficiency of SP = { Profitability; Risk } (1)

It is offered to understand the economic category characterizing a ratio of results and expenses of SP as "profitability". In a general view profitability of SP can be expressed a formula (2):

Profitability = { NPV; IRR; PI; MIRR } (2)

This definition doesn't conflict at all to term "efficiency" definition as definition of the concept "efficiency" is, as a rule, given for a case of full definiteness i.e. when the second coordinate of "vector" - risk, is equal to zero.

Efficiency = { Profitability; 0 } = Results / Expenses (3)

I.e. in this case:

Efficiency Profitability (4)

However in a situation it is impossible to tell "uncertainty" with confidence for 100% about the size of results and expenses as they aren't hit yet but only are expected in the future therefore there is a need to introduce amendments in this formula, namely: