Profitability
Profitability is an entity's ability to generate profit relative to a base such as revenue or capital employed. Compare profit with revenue to examine margins and with capital employed to assess the return generated on financing. Use consistent definitions and compare like periods. Strong profitability does not necessarily mean that receivables will be collected in time to pay suppliers. Compare ratios with suitable peers as well as with the entity's own prior results.
Worked example
A 20% gross margin indicates 20 of gross profit per 100 of revenue.
Common mistake
A single ratio cannot show liquidity, cash generation or the reason for a change.
Where it appears in your exams
| Qualification | Exam | Relationship | Period |
|---|---|---|---|
| ACCA | F3 | Supporting | July 2027–August 2028 |
| ACCA | FA | Direct | September 2026–June 2027 |
| ACCA | FR | Direct | Official assessment-window verification pending |
| ACCA | K1 | Direct | July 2027–August 2028 |
| CIMA | BA3 | Direct | Official assessment-window verification pending |
| FIA | FFA | Direct | September 2026–June 2027 |
