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# What is the difference between profit and profitability

profitability profitability analysis
New answer on Jun 22, 2022
6 Answers
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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.

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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

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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

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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.

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Hello!

+1 Sidi, and it leads to one of the key things when casing: always clarify the target and wording, since it can be all the difference!

Cheers,

Clara

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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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Sidi gave the best answer
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