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Profitability

Definition

Profitability refers to the ability of a business or activity to generate more revenue than the costs incurred in producing its goods or services. It's an indicator of how efficiently a company can convert its resources into profits.

Analogy

Think of profitability like baking cookies. You have your ingredients (costs) and you sell your cookies (revenue). If you sell each cookie for more than what it cost to make, then you're profitable!

Related terms

Gross Margin: This is the difference between revenue and cost of goods sold, divided by revenue, expressed as a percentage. It's like knowing how much profit you get from each cookie before considering other expenses like rent or utilities.

Return on Investment (ROI): This measures the gain or loss made on an investment relative to the amount invested. It's like calculating whether buying that expensive mixer was worth it based on how many more cookies you could bake and sell.

Net Income: This is the total earnings after subtracting all expenses including taxes and costs from total revenue. It’s like counting how many cookies are left after paying for everything else.