The profitability index, or PI, is a business metric used to evaluate investments. It shows how much economic return is expected in relation to the capital invested.
The basic calculation is as follows:
Profitability index = present value of expected cash flows ÷ investment costs
Alternatively, the profitability index can be calculated using the net present value:
Profitability index = (net present value + investment costs) ÷ investment costs
The result is classified as follows:
| Profitability Index | Meaning |
| greater than 1 | The expected returns exceed the investment costs. |
| equal to 1 | The investment is expected to cover the costs incurred exactly. |
| less than 1 | The expected returns are lower than the investment costs. |
One example:
| Key figure | Amount |
| Capital expenditure | 100.000 € |
| Present value of expected cash flows | 125.000 € |
| Profitability Index | 1,25 |
A profitability index of 1.25 means that, for every euro invested, a discounted return of 1.25 euros is expected.
The profitability index helps companies and start-ups to:
- to compare various investment projects
- to make targeted use of limited financial resources
- to prioritise economically viable projects
- To provide clear and transparent justifications for investment decisions
- to better categorise projects of different sizes
This ratio is particularly useful when there are several projects to choose from but there is not enough capital available for all the investments. A higher profitability index generally indicates a more favourable ratio between expected return and capital employed.
However, the profitability index should not be considered in isolation. Risks, time horizons, strategic objectives and the underlying assumptions can also influence the investment decision. Particularly in the case of young start-ups, future revenue and returns are often difficult to predict.
innoWerft helps start-up founders to assess the economic viability of investment projects and business models, to understand relevant key performance indicators, and to present financial assumptions in a clear and comprehensible manner for discussions with investors and other funders.