Before I get to answering any of the assigned questions I would like to address a certain
confusion most people with lesser business knowledge have. That confusion is the difference
between profitability and profit. It makes sense why someone would confuse these two terms.
To point out the obvious, profit is the prefix of the word profitability. Therefore, one may be led to
believe that profitability and profit are similar things. These two terms may not be similar, but
they do work with each other. Let me explain…
Say you are comparing two different companies, Company A and Company B. Company A
had total revenue of 2 million dollars and Company B had total revenue of $1,000,000. On the
contrary, Company A had a total of 1.8 million dollars in expenditures, whereas Company B had
a total of $800,000 in expenditures. If you look at these figures you will then see that both
companies had the same amount of profit. However, the profitability ratios are drastically
different. Company A had to sacrifice three times as much money as Company B in order to
reach their two million dollar Revenue. Interpreting these figures, you will see that Company A‘s
profitability ratio comes out to about 10%. On the other side, Company B has a profitability ratio
of about 25%. The math is pretty simple, subtract a companies expenses from their revenue,
then divide that number by the revenue to get the net profit margin/profitability ratio (ex:
2,000,000 – 1,800,000 = 200,000/2,000,000 = 0.1 = 10%). Now that you know the differences
between profit and profitability, let’s talk about what exactly determines a company‘s profitability
and why it is important.
There are five quantitative as well as five qualitative indicators of whether a company is
profitable. Starting with the quantitative indicators. The five quantitative indicators of profitability
include the amount of total sales, cost of goods sold, operating expenses, interest expenses,
