Profitability Analysis

Profitability is the most important performance measure used in business operations. Although it does not imply value, profit maximization signifies investment returns (interest and dividends paid to debtholders and shareholders) and growth potential (retained earnings). Therefore, investors and other users of financial statements tend to be more attentive to news about profitability than other financial metrics, thus making it the most important ratio in financial analysis. This chapter, therefore, takes a special interest and focuses on the key profitability ratios, aiming to demonstrate their implications in corporate valuation.