ANALYSIS OF PERMANENT CAPITAL RATE OF RETURN

Permanent capital represents the permanently operating funds in the enterprise’s business. These are equity and long-term borrowings (long-term liabilities).There are a number of circumstances that make the issue of permanent capital and the efficiency of its use topical. For example, it is important for the enterprise’s financial stability to have an amount of permanent capital bigger than the amount of fixed assets. If permanent capital is less than fixed assets, this means that some of the fixed assets have been funded with short-term borrowings, being a prerequisite for deterioration of the enterprise’s financial stability. From this perspective, the funding coefficient of fixed assets calculated as a ratio of the amount of permanent capital to the amount of fixed assets should be bigger than one.Rate of return of permanent capital characterizes the efficiency of its use. Specialized literature broadly reflects the opinion that the rate of return of permanent capital is a key business indicator, and in combination with the total return of assets and the return of both the entire invested capital and of equity, it represents the efficiency of use of funds invested in the enterprise’s business.Depending on the used profit value (accounting or book profit), we are able to calculate the gross and net rate of return of the enterprise’s permanent capital.The object covered by this publication is the rate of return of permanent capital, and the subject matter – the methodology for its analysis. It suggests various models for analysis of the rate of return of permanent capital. The publication determines the impact of different factors on the deviations occurred in the rate of return of permanent capital. These are, for example, changes in load ratios – absorption of equity, own fixed capital, long-term borrowings, respectively, and turnover ratios – deployment of own working capital and income-based rate of return, respectively.The author expresses the thesis that objective opportunities for improvement of the methodology for analysis of the rate of return of permanent capital exist. On this basis, the methodologies for analysis of the rate of return of the entire invested capital, of equity and of permanent capital may be used in combination, and the resultative information obtained can be deployed for making timely effective decisions for the development of business and the achievement of desired efficiency of the enterprise’s operation.