Profitability describes, how successfully a company manages its financial resources. It compares the profit made with the capital invested or with turnover.
This key figure therefore shows not only whether a company is making a profit, but also how efficiently it utilises its resources.
Typical forms of profitability include:
| Key figure | Meaning |
| Return on sales | Profit-to-turnover ratio |
| Return on equity | Ratio of profit to equity capital employed |
| Return on total capital | Ratio of profit and interest on borrowed capital to total capital |
| Return on investment | Ratio of returns to the costs of an investment |
A simplified example:
A start-up makes a profit of 50,000 euros on a turnover of 500,000 euros.
50,000 euros ÷ 500,000 euros × 100 = 10 per cent return on turnover
This means that for every euro generated, ten cents remains as profit.
For start-ups, profitability is important in order to:
- to assess economic development
- Comparing business models
- To review prices and cost structures
- To categorise investments more effectively
- to improve financial stability
- To present reliable key figures to investors and funders
High profitability may indicate that a company is using its resources efficiently. However, low or negative profitability is not necessarily a cause for concern in the case of young start-ups. In the early stages of growth, there are often high costs associated with product development, staffing, marketing or market entry.
It is therefore crucial to always consider profitability in the context of the company’s stage of development, sector, growth and business model.
Ways to improve profitability include:
- Increase turnover
- Optimising prices and pricing models
- Reduce variable and fixed costs
- Making processes more efficient
- prioritise profitable products or customer groups
- Revise unprofitable offers
A common mistake is to equate profitability with liquidity. A company may be profitable on paper yet still have insufficient cash available in the short term.
innoWerft helps start-up founders to analyse business models and cost structures, interpret relevant financial indicators, and present economic assumptions regarding growth and discussions with investors in a clear and comprehensible manner.