What Is Profitability?
To simply put, It’s the ability of a business to generate sufficient cash flow from its operations on a sustainable basis so that there is enough money left to keep after paying off all expenses and obligations.
Profitability is not a snapshot in time, rather a reflection of the underlying health of a business driven by key factors such as sustained sales/growth, healthy margins, robust operating and business model, healthy operations and low-cost structure, efficient cash flow management, consistent positive cash flows, and solid financial management.
Profitability is like the iceberg. What you see above the surface is just a small portion, but the bigger and more relevant drivers of profitability are beneath the surface, hiding within revenues and expenses. If you can identify and tackle them individually and move them in the right direction; that is when you can see a real and sustainable shift in profitability.
In a simple world, if you make more than you spend, most people think of that as profit. But in a business, there are a lot more variables involved that determine profitability. To gain a thorough understanding of all such variables, we must dig down deeper into the financial statements and do both vertical and horizontal analysis of major drivers identified above, as well as derive financial metrics such as gross margin, gross profit, operating profit, net income, return on assets (ROA), return on investment (ROI), and return on equity (ROE), to gauge the overall health and profitability of a business.