Profitability analysis is used by business leaders to identify various ways of optimizing company profitability across areas like products, projects, or plans. It involves a systematic analysis of profits generated from various revenue streams of the company.Profitability analysis is often a part of enterprise resource planning (ERP). Simply put, this process analyzes the costs and revenues of a company (or unit or product) to further determine whether the company as a whole or its units or products/services are profitable.
Profitability analysis allows businesses to get an all-encompassing picture of the company’s profits, the ways that it derives profits, profitability ratios, and more. Some of the top ratios that form part of profitability analysis are:a. gross profit marginb. net profit marginc. return on equityd. return on capital employedThese help companies understand how well they are using the available assets, the extent of revenue they can generate against the costs, the company's ability to convert sales into profits, etc.