🔍 What is profitability?
Profitability evaluates a business’s ability to generate income in relation to its expenses and investments.
💡 Why is it important?
This metric is essential for understanding operational and financial efficiency, and whether current operations are generating an adequate return on investment.
🎯 Desired range or level
A business should aim to have a positive and growing profit margin.
📊 Key Indicators
Profit Margin
🔍 What is it?
The ratio between net profit and sales. It shows what percentage of sales turn into profit.
💡 Why is it important?
Helps understand the company’s ability to retain profits after all expenses.
🎯 Desired range
A higher margin is preferable, as it indicates stronger profitability.
🔣 Formula
Profit Margin = Net Income / Total Sales
Operating Margin
🔍 What is it?
Operating profit divided by sales. It reflects efficiency in core operations.
💡 Why is it important?
Indicates how much remains after deducting operating expenses.
🎯 Desired range
As with profit margin, a higher operating margin is better.
🔣 Formula
Operating Margin = Operating Income / Total Sales
Return on Equity (ROE)
🔍 What is it?
Measures the company’s ability to generate a return on the capital invested. In other words, the profit generated from shareholders’ equity.
💡 Why is it important?
A positive number means the company is increasing equity, while a negative one shows a decline.
🎯 Desired range
A higher ROE indicates better investment performance. What counts as “good” varies by industry and size. The key is to compare with similar businesses and track growth over time.
🔣 Formula
ROE = Net Income / Shareholder Equity
✅ Actions to improve profitability
Optimize costs through supplier reviews and contract renegotiations.
Improve operational efficiency to reduce waste and increase productivity.
Boost sales via marketing campaigns and product or service expansion.