5.5.1 Concept of Importance of Profitability
The concept and importance of profitability
As we saw in Income statements, profit is a crucial business objective.
Profitability takes this one step further. It measures how efficiently a business is making a profit. The magic tools that allow us to measure profitability are ratios.
Firstly, what are ratios? Ratios aren’t just used in analysis of accounts but throughout everyday life, as a means of measuring performance.
Let’s take the example of football’s greatest rivalry Messi vs Ronaldo. Who has the best scoring ratio?
Ronaldo scores 440 goals in 487 league games. Messi scores 408 goals in 313 league games. As Ronaldo has played more games how can we compare who is the more efficient goal scorer?
|Who is the more efficient goals scorer?|
(Goals per game ratio)
440 goals in 487 games
440 goals ÷ 487 games
= 0.8 goals per game
408 goals in 313 games
408 goals ÷ 313 games
= 1.18 goals per game
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