[Daily Learning] The Institute’s Asset and Finance Department explains: What are the “Two Profits and Four Ratios”?

What are the “Two Profits and Four Ratios”?

At work meetings, we often hear the term “two profits and four ratios,” yet many colleagues admit they’re not entirely clear about it. In fact, “two profits and four ratios” is an assessment framework introduced by the State-owned Assets Supervision and Administration Commission (SASAC) to guide central enterprises toward high-quality development. So, what exactly do these “two profits and four ratios” indicators refer to?

Introduction: In 2019, the State-owned Assets Supervision and Administration Commission (SASAC) introduced the “Two Profits and Three Ratios” performance assessment framework. On December 24, 2020, at the meeting of heads of central enterprises, Hao Peng, Secretary of the Party Committee and Director of SASAC under the State Council, stated that in 2021, SASAC would incorporate an enterprise-wide labor productivity indicator, thereby establishing a “Two Profits and Four Ratios” assessment system to encourage enterprises to focus on enhancing operational efficiency and improving development quality, thus better achieving high-quality development.

What are “two benefits”?

1 Total Profit

Total profit is the aggregate profit realized by an enterprise through its production and business activities over a specific period, i.e., the enterprise’s “pre-tax profit.”

Total profit = Operating profit + Non-operating income − Non-operating expenses

The total profit of an enterprise consists primarily of two components: operating profit and non-operating net income or expenses (with non-operating expenses reducing profit). Specifically, operating profit is the profit generated from a company’s regular production and business activities and represents the earnings derived from its core operations; non-operating net income or expenses, on the other hand, arise from activities outside the company’s principal business and are characterized by their occasional and unpredictable nature.

2 Net profit

Net profit refers to the amount remaining after deducting income taxes from a company’s total profit for the period, also known as “profit after tax.”

Net profit = Total profit − Income tax expense

Net profit is the ultimate outcome of a company’s operations: the higher the net profit, the better the company’s operational performance; the lower the net profit, the poorer the performance. It is the primary metric for assessing a company’s operating efficiency.

What are the “Four Rates”?

1 Debt-to-asset ratio

The debt-to-asset ratio is an indicator used to assess a company’s ability to finance its operations with funds provided by creditors and to gauge the level of security associated with creditor‑provided loans. It is calculated by dividing total liabilities by total assets, thereby reflecting the proportion of a company’s total assets that is financed through debt.

Debt-to-asset ratio = Total liabilities / Total assets × 100%

The debt-to-asset ratio indicates the proportion of a company’s total assets that are financed by liabilities, serving as a comprehensive measure of its leverage. It also assesses the company’s ability to utilize creditors’ funds in its operations and reflects the degree of safety associated with creditors’ lending.
2 Operating profit margin
The operating income margin is the ratio of a company’s operating profit to its total operating revenue, expressed as a percentage.

Operating profit margin = Operating profit / Total operating revenue × 100%

The operating profit margin is a relative indicator of a company’s operational efficiency, reflecting the management’s ability to generate profits through operations after accounting for operating costs. It can be used both to assess the fulfillment of a company’s profit plan and to compare the level of operational management across different enterprises and over time.

3 Total factor productivity
    Total factor productivity is the ratio of the total output generated by all workers over a given period to the corresponding amount of labor input. The level of labor productivity can be expressed either as the quantity of a particular product produced per unit of time by the same workforce—higher output per unit of time indicates higher labor productivity—or as the amount of labor time required to produce a unit of output—shorter labor time per unit of output corresponds to higher labor productivity.

Total labor productivity = Gross value of output from labor / Number of employees

4 R&D intensity
    As the name suggests, R&D intensity refers to the ratio of a company’s R&D expenditures to its operating revenue.

R&D intensity = R&D expenditure / Operating revenue × 100%

R&D intensity is an indicator that measures a company’s level of commitment and investment in research and innovation. However, it is important to note that direct comparisons across industries or business models are not appropriate, as the composition of revenue streams varies significantly among different sectors.

2022 On January 19, the State-owned Assets Supervision and Administration Commission (SASAC) officially announced that this year’s objectives for central state-owned enterprises are “two increases, one control, and three improvements.”

“The ‘two increases’ correspond to the ‘two profits’ in the ‘two profits and four ratios’:”

“The ‘two increases’ mean that the growth rates of total profit and net profit must exceed the national economic growth rate.”

“The ‘One Control and Three Improvements’ correspond to the ‘four rates’ within the ‘Two Profits and Four Rates’:”

“One control” means keeping the asset–liability ratio below 65%; “three increases” refers to raising the operating income profit margin by an additional 0.1 percentage point, boosting total‑employee labor productivity by another 5%, and further increasing R&D spending.