Profitability

Definition: 

The ability of a firm to generate profit (the difference between revenue and expenses). The core reason for business operations. 

Firms can aim for profitability by lifting prices, expanding product mix, using debt to leverage operations, cutting costs. 

Short-term focus on profitability can lead to excessive risk taking (liquidity and solvency issues).

Ratios and Statements:

• Gross Profit Ratio (Income Statement)

• Net Profit Ratio (Income Statement)

• Return on Equity (Income Statement and Balance Sheet)