What is profitability?
This is the ability of a business to make money. Without profitability, a business cannot survive in the long run. Profitability can be measured with income and expenses and recorded in a business’s income statement.
Where have you heard of profitability?
It’s the main aim of all businesses and is the most important measure of their success. A company that isn’t profitable can’t survive, but a business with high levels of profitability can reward its owners with a big return on their investment.
What you need to know about profitability.
It’s not the same as profit, although the two terms are sometimes used interchangeably. Profit is a number, calculated depending on the income or revenue of a company above and beyond its costs and expenses. Profitability is a measurement of efficiency, and is a relative amount rather than a figure. So even if a company creates a profit, this does not necessarily mean it is profitable. Increasing profitability is one of the most important aims of a company’s managers. They may use partial budgeting to assess the impact of any changes, and analyse the impact with an income statement.
Find out more about profitability.
One way of assessing the financial health of a business is with profitability ratios. See our guide to find out more.