What does profitability measure?

Profitability measures the ability of a company to generate profit relative to its revenues, expenses, or equity. It is a key indicator of financial health and operational efficiency, revealing how well a business converts its activities into profit. In essence, profitability showcases how effectively a company utilizes its resources to produce income beyond its costs.

This is particularly important for stakeholders, including investors and management, as it provides insight into the company's potential for growth and sustainability. Companies that maintain strong profitability ratios are often considered more desirable, as they indicate a sound business strategy and the capacity to reinvest in further development or distribute dividends to shareholders.