Profitability is defined as the
potential of a company to exceed its overall revenue from its total expenses
which result in profit generation. Business must achieve profitability in order
to sustain its operations. It is impossible to imagine a business without
profitability. Profitability differs from profit. Profit has a currency unit to
measure while profitability is generally measured as a rate of profit to
revenue.
potential of a company to exceed its overall revenue from its total expenses
which result in profit generation. Business must achieve profitability in order
to sustain its operations. It is impossible to imagine a business without
profitability. Profitability differs from profit. Profit has a currency unit to
measure while profitability is generally measured as a rate of profit to
revenue.
Profitability = Profit__
Revenue
Types of profitability ratios
The two types of profitability ratio
are:
are:
1. Margin
ratio:
Margin ratio represent the firm’s ability to translate sales dollars into
profit. This include: gross profit margin, operating margin.
ratio:
Margin ratio represent the firm’s ability to translate sales dollars into
profit. This include: gross profit margin, operating margin.
2. Return
ratio:
Return ratios measure the overall ability of the firm to generate wealth. This
includes:
ratio:
Return ratios measure the overall ability of the firm to generate wealth. This
includes:
A. Return
on investment
on investment
B. Return
on equity
on equity
C. Cash
return on Assets
return on Assets
