Many business owners understand profitability from a fundamental standpoint—if your income statement shows more revenue than expenses, you’re making a profit. However, business owners should look beyond the simple profit amount to measure profitability.
This dollar amount doesn’t indicate why the business’s profitability is sustainable. Analyzing key metrics can help owners determine whether their company is healthy—not just from an accounting perspective but holistically.
By calculating and comparing metrics, owners can identify the areas of the business that are working well—and those that need improvement. There are three primary ways to determine whether you’re a profitable business: profitability margin ratios, break-even analysis, and return ratios. Let’s start by looking at profitability margin ratios: