The profitability of a company is a measure of how profitable a company is. It's a ratio that indicates how much profit a company makes compared to its total assets.
The simplest way to calculate profitability is by dividing the net income by the total assets. This ratio is called the 'net profitability'.
For example, imagine you have a company that made $200,000 in net income last year and has $1,000,000 in total assets. The calculation would be as follows:
Net Profitability = Net Income / Total Assets Net Profitability = $200,000 / $1,000,000 Net Profitability = 0.20 or 20%
A profitability of 20% means that the company makes a profit of $0.20 for every dollar in total assets. The higher the profitability, the more profitable the company.
Profitability can be used to compare companies with each other, or to track a company's performance over time. If profitability is increasing year over year, it means the company is becoming more profitable.
It's also important to view profitability in the context of the industry. Some industries generally have higher profit margins than others. Therefore, a profitability of 10% in one industry might be considered low, while in another industry it might be considered high.