Learn how to calculate profitability ratio and measure your business's ability to generate profit.
The profitability ratio (also called net profit margin or profit ratio) measures how much profit you make per dollar of revenue. Formula: Profitability Ratio = Net Income ÷ Revenue × 100. A ratio of 15% means you keep $0.15 profit for every $1.00 in sales. Higher ratios indicate better profitability and efficiency. This is the same as profit ratio and net profit margin. Learn more about profitability ratios explained for comprehensive coverage.
Profitability Ratio = (Net Income ÷ Revenue) × 100
This measures net profit margin—the percentage of revenue that becomes profit after all expenses.
Learn more about profitability ratios explained and use our net income calculator.
Very profitable. Strong pricing power or excellent cost control.
Healthy profitability. Good balance of revenue and expenses.
Moderate profitability. May need to improve margins or reduce expenses.
Low profitability. May struggle to cover expenses or grow.
Grow sales through marketing, new products, or expanding to new markets.
Cut unnecessary costs, negotiate better vendor terms, or improve operational efficiency.
If you have pricing power, increase prices to improve margins.
Generally, 10-20% is considered good for most small businesses. Service businesses often have higher ratios (15-30%), while retail and restaurants have lower ratios (3-7%). Compare to industry benchmarks.
Lenders check profitability ratios to assess your ability to generate profit and repay loans. Higher ratios improve approval chances. Learn about how to qualify for business loans.
Comprehensive guide to all profitability ratios.
Alternative name for the same calculation.
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