To be successful and remain in business, both profitability and growth are important and necessary for a company to survive and remain attractive to investors and analysts. Profitability is, of course, critical to a company's existence, but growth is crucial to long-term survival.
Key Takeaways
- When evaluating a company, what should you weigh heavier: profitability or growth?
- A growing company may not be earning any profits yet, but may nevertheless provide a great investment opportunity.
- Other times, a lack of profitability can be a huge red flag that something is wrong with the firm.
Profitability
A company's net profit is the revenue after all the expenses related to the manufacture, production, and selling of products are deducted. Profit is "money in the bank." It goes directly to the owners of a company or shareholders, or it is reinvested in the company. Profit, for any company, is the primary goal, and with a company that does not initially have investors or financing, profit may be the corporation’s only capital.
Without sufficient capital or the financial resources used to sustain and run a company, business failure is imminent. No business can survive for a significant amount of time without making a profit, though measuring a company's profitability, both current and future, is critical in evaluating the company.
Although a company can use financing to sustain itself financially for a time, it is ultimately a liability, not an asset.
An income statement shows not only a company’s profitability but also its costs and expenses during a specific period, usually over the course of a year. To compute profitability, the income statement is essential to create a profitability ratio. A number of different profitability ratios can be calculated from which to analyze a company's financial condition.
Growth
Determining and focusing on profitability at the beginning, or start-up, of a company, is essential. On the other hand, growth of market and sales is the means to achieving that initial profitability. Identifying growth opportunities should become the next important item on any company’s goal list after a company moves beyond the start-up phase.
Growth for a business is essentially an expansion, making the company bigger, increasing its market, and ultimately making it more profitable. Measuring growth is possible by looking at some pertinent statistics, such as overall sales, the number of staff, market share, and turnover.
Though the present profitability of a company may be good, growth opportunities should always be explored since they offer opportunities for greater overall profitability and keeps analysts and potential, or current, investors interested in the company.
Knowing the present condition of any company is essential to creating a successful growth strategy. If a company has too many weak areas, such as performance, sales or marketability, a premature attempt to grow can ultimately collapse the business. A first step is the consolidation of current markets, essentially meaning the lockdown of the current state of a company before attempting to alter it with growth.
The Bottom Line
Profitability and growth go hand-in-hand when it comes to success in business. Profit is key to basic financial survival as a corporate entity, while growth is key to profit and long-term success. Investors should weigh each factor as it relates to a particular company.
FAQs
To be successful and remain in business, both profitability and growth are important and necessary for a company to survive and remain attractive to investors and analysts. Profitability is, of course, critical to a company's existence, but growth is crucial to long-term survival.
What is more important for a business, profitability or growth? ›
If you hope for your company to be acquired or plan to take your company public, then high growth may be your business's most important metric, as it can attract investors and buyers.
Why is profitability important for a business? ›
Earning a profit is important to a business because profitability impacts whether a company can secure financing from a bank, attract investors to fund its operations and grow its business. Companies cannot remain in business without turning a profit.
What is more important than profit in a business? ›
Most small-scale businesses and start-ups begin with the end (profit) in mind. But what they overlook is the importance of cash flow over profit. Business owners remain unaware of the fact that cash flow is very important for the financial health of their firm.
Why is profitability the most important measure of performance? ›
Profitability is the primary goal of all business ventures. Without profitability the business will not survive in the long run. So measuring current and past profitability and projecting future profitability is very important. Profitability is measured with income and expenses.
Why is growth important in business? ›
The long-term survival of a business depends on growth. Profit and corporate performance are fueled by it. For a variety of reasons, business growth can be beneficial. It might enable you to take many opportunities, broaden your offerings, draw in more clients, boost revenue, and hire additional personnel.
What is profitability and growth? ›
Profitability, on the other hand, is a metric that measures success relative to the scope of the business. Growth can be measured in a number of ways. You can grow by boosting revenues from more sales or more expensive sales, or by extending to another market.
Can a business survive without profit? ›
Without sufficient capital or the financial resources used to sustain and run a company, business failure is imminent. No business can survive for a significant amount of time without making a profit, though measuring a company's profitability, both current and future, is critical in evaluating the company.
What does profitability tell you about a company? ›
Profitability ratios assess a company's ability to earn profits from its sales or operations, balance sheet assets, or shareholders' equity. They indicate how efficiently a company generates profit and value for shareholders. Profitability ratios include margin ratios and return ratios.
What will happen if you do not make a profit? ›
The answer to the question, “What if there were no profits?” requires us to think through all the things profits are used for. Profit is the leftover when revenues exceed expenses. If there is no profit, it means companies can't pay their bills.
Revenue growth provides the financial stability that a business needs to weather challenges and uncertainties. It ensures that a company has the resources to invest in research, development, and innovation, enabling it to adapt to changing market conditions and stay competitive.
Is earnings growth more important than revenue growth? ›
Earnings is arguably the most important measurement of growth for a business, as earnings growth indicates the health and profitability of a business after all expenses are paid. Conversely, revenue growth refers to the annual growth rate of revenue from total sales.
Is profit the most important objective of a business? ›
Profit is the extra income over the expenses. The main objective of any business is to earn a profit. Just as a plant cannot survive without water, similarly a business cannot sustain without profit. Profit is necessary for growing and expanding business activities.
What is the most important factor for profitability? ›
The number of production units, production per unit, direct costs, value per unit, mix of enterprises, and overhead costs all interact to determine profitability. The most basic factor affecting profit in any business is the number of production units.
What is the most important indicator of profitability? ›
A good metric for evaluating profitability is net margin, the ratio of net profits to total revenues.
How to know if a business is profitable? ›
At What Percentage Is a Business Profitable? Technically as long your income exceeds your expenses, you're a profitable business. However, the desired net profit margin ratio is higher. Ideal profits vary depending on your industry, but a gross profit margin ratio of 50-70% is generally considered good.
Why is growth over profit? ›
As soon as you have the cash flow managed, you should focus on growth, not profits. Profits are today, and growth is tomorrow. You need today assured by cash flow, but don't sacrifice more today than you have to when you pay for it with tomorrow.
Which is more important turnover or profitability? ›
Is Turnover More Important Than The Profit? Business experts love to say that theTurnover is vanity, but the profit is sanity. It simply means that while the massive sales turnover looks impressive, there is rarely a commercial benefit to this unless it creates the profit. But there are some exceptions.
Should I focus on revenue or profit? ›
Profit is the money left over after expenses are deducted from revenue earned. Both revenue and profit are essential to understand and track, but profit provides a more complete picture of a company's financial health.
At what stage of growth is a business profitable? ›
The stage of growth at which a business becomes profitable, with sufficient funds to reinvest in the company is the "Mature" stage. Option C: MatureTherefore, the correct answer is C. Mature. During the mature stage, a business experiences steady growth and profitability.
