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What is the difference between profit and profitability

Hey guys,

I have been watching a case video on the chewing gum manufacturer (https://www.youtube.com/watch?v=DamZmMbp5eM) and tried to completely follow all the steps and explanations. Right in the beginning the interviewer says that profits have gone up, while profitability declined. I don't understand this point. In my understanding profitability = profit/revenue

This means, however, that when profits go up profitability will also go up. The easiest explanation I can think of is that the interviewer wanted to say that revenues have increased while profitability decreased.

I would highly appreciate any clarification on this.

Thanks a lot

Martin

Hey guys,

I have been watching a case video on the chewing gum manufacturer (https://www.youtube.com/watch?v=DamZmMbp5eM) and tried to completely follow all the steps and explanations. Right in the beginning the interviewer says that profits have gone up, while profitability declined. I don't understand this point. In my understanding profitability = profit/revenue

This means, however, that when profits go up profitability will also go up. The easiest explanation I can think of is that the interviewer wanted to say that revenues have increased while profitability decreased.

I would highly appreciate any clarification on this.

Thanks a lot

Martin

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As highlighted several times, absolute profits are clearly defined as Revenues - Cost.

Profitability however, even though always expressed as a ratio/percentage, is not universally defined. It can be measured differently (and it IS measured differently, depending on industry and context). Broadly speaking, profitability ratios are a class of financial metrics that are used to assess a business's ability to generate earnings compared to its turnover OR expenses OR asset base OR other points of reference during a specific period of time.

So whenever asked about profitablitly in a case, it is IMPERATIVE to clarify the exact metric which defines profitability in this situation.

As highlighted several times, absolute profits are clearly defined as Revenues - Cost.

Profitability however, even though always expressed as a ratio/percentage, is not universally defined. It can be measured differently (and it IS measured differently, depending on industry and context). Broadly speaking, profitability ratios are a class of financial metrics that are used to assess a business's ability to generate earnings compared to its turnover OR expenses OR asset base OR other points of reference during a specific period of time.

So whenever asked about profitablitly in a case, it is IMPERATIVE to clarify the exact metric which defines profitability in this situation.

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Profit is a currency figure (e.g. USD), profitability is a % figure. It is possible for profits to go up while profitability going down. As an example: let's assume a company sells cars at average price of $100k with an average profit of $10k each (10% profitability). And let's assume they sell on average 1,000 cars each year. This year they decide to run a limited time promotion and sell their cars at $95k each, this brings additional 200 car sales but with only $0.5k profit each (5%) profitability. The new blended profitability of company is ($10k*1,000 + $0.5k*200)/($100k*1,000 + $95k*200)=8.5%. 8.5% is less than 10% however their profits went up from $10M to $10.1M

Hope this helps.

Andrea

Profit is a currency figure (e.g. USD), profitability is a % figure. It is possible for profits to go up while profitability going down. As an example: let's assume a company sells cars at average price of $100k with an average profit of $10k each (10% profitability). And let's assume they sell on average 1,000 cars each year. This year they decide to run a limited time promotion and sell their cars at $95k each, this brings additional 200 car sales but with only $0.5k profit each (5%) profitability. The new blended profitability of company is ($10k*1,000 + $0.5k*200)/($100k*1,000 + $95k*200)=8.5%. 8.5% is less than 10% however their profits went up from $10M to $10.1M

Hope this helps.

Andrea

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During an engagement with an actual client I agree with Sidi that profitability needs to be defined. During a case interview candidates are not required nor expected to know he technical differences between different profitability metrics. Therefore the question seems superfluous to me.

During an engagement with an actual client I agree with Sidi that profitability needs to be defined. During a case interview candidates are not required nor expected to know he technical differences between different profitability metrics. Therefore the question seems superfluous to me.

Hi Martin,
Profitability is indeed Profits/Revenue
From this profitability going down just means the increase in profits has been less significant than the increase in revenue (for ex +20% in revenue that only translated in +10% profits will give you "New Profitability" = 1.1* Profits / 1.2* Revenue = (1.1/1.2) * old profitability, which is < to old profitability as 1.1/1.2 < 1.

A smarter way to see this is that revenues have increased costs have increased with a higher %.

Hope it helps,
Achot

Hi Martin,
Profitability is indeed Profits/Revenue
From this profitability going down just means the increase in profits has been less significant than the increase in revenue (for ex +20% in revenue that only translated in +10% profits will give you "New Profitability" = 1.1* Profits / 1.2* Revenue = (1.1/1.2) * old profitability, which is < to old profitability as 1.1/1.2 < 1.

A smarter way to see this is that revenues have increased costs have increased with a higher %.

Hope it helps,
Achot

Hey Martin,

Despite the fact that both terms are often used with the same meaning, they actually mean different things:

  • Profit = Revenues - Costs
  • Profitability is a relative/percentage number = ratio between profits and revenue

Hope this helps clarifying your question

Best

Bruno

Hey Martin,

Despite the fact that both terms are often used with the same meaning, they actually mean different things:

  • Profit = Revenues - Costs
  • Profitability is a relative/percentage number = ratio between profits and revenue

Hope this helps clarifying your question

Best

Bruno

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