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Profit vs. Profitability

Written By: Roshni Bhatia on March 13, 2011 No Comment

Profit and Profitability are two separate concepts, that have a different meaning. Majority of people are unaware that these are two different concepts altogether. So it is essential that one understands the key differences among the two before determining a firm’s success or failure.

Profit: Refers to the net earnings. In order words it is simply Revenue minus Expenditure. It reflects the actual earnings of the business including any non-operating income or loss. It could be profit after tax(PAT) or profit before tax(PBT). For instance, XYZ firm makes a profit of Rs. 10 lakhs. It is an absolute number.

Profitability: Reflects the final result of business operation. It refers to the operating net profit i.e. profit before considering non-operating income or expenses. It helps to establish future earning capability of the business. Profit is an absolute figure whereas profitability is in relation to the sales or capital employed. For instance, XYZ firm makes Rs. 10 lakhs from Rs. 100 lakhs invested in the business, then its profitability is 10%. It is typically expressed as a percentage.

Still Confused? Let me explain further.

Say there are two companies A and B with the same profit: Rs. 2 lakhs. But A invested Rs. 5 lakhs to generate this profit whereas B invested Rs. 10 lakhs to generate the same amount of profit. Now can you tell me which company is better? Company A is anyday better than Company B as its profitability is higher than that of B as it is making efficient use of capital employed in the business to generate profits.

Thus, loss due to fire would reduce the profit of a business but not the profitability of a business because it is not an operating loss. Similarly any abnormal gain would increase the profit of a business but the profitability would remain the same.

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