Profitability

Published Jan 22, 2023

Definition of Profitability

Profitability is a measure of how much money a company makes relative to its expenses. That means it is a measure of how efficiently a company is using its resources to generate revenue. It is usually expressed as a percentage and calculated by dividing the company’s net income by its total revenue.

Example

To illustrate this, let’s look at the example of a small retail store. The store has total revenue of USD 100,000 and total expenses of USD 80,000. That means the store has a net income of USD 20,000. To calculate the profitability of the store, we divide the net income by the total revenue, which gives us a profitability of 20%.

Why Profitability Matters

Profitability is an important measure for any business. It is a key indicator of how well a company is performing and how efficiently it is using its resources. A company’s profitability can also be used to compare it to its competitors and to the industry average. This allows investors and analysts to make informed decisions about whether or not to invest in a company.

In addition to that, profitability is also an important factor for lenders when deciding whether or not to provide a loan to a company.