What Are the Most Common Measures of Profitability?
Profitability is one of the most important metrics to track for a business. It can help a company make informed decisions about pricing and marketing strategies to improve overall profitability. There are many different ways to measure profitability. However, the net profit margin is one of the most common. It reveals how much money a company earns goes directly to its bottom line after all expenses are accounted for. The gross profit margin is a measure of profitability that reflects the efficiency of a company's management in earning profits for every dollar it spends on producing goods or services. Generally, higher gross margins mean more money is left over to cover operating expenses. The two main components determining gross profit margin are revenue and cost of goods sold (COGS). COGS includes direct costs, such as labor, material, and packaging, as well as variable costs that change based on production numbers. Lower gross profit margins indicate that a company's opera