Resource
Profitability Ratio Formula
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.
- Profitability Ratio = (Net Income ÷ Revenue) × 100
- 20%+ is excellent; 10-20% is good; 5-10% is fair; below 5% is poor
- Higher ratios improve loan approval chances
- Service businesses: 15-30%; retail and restaurants: 3-7%
Profitability Ratio Formula
Profitability Ratio = (Net Income ÷ Revenue) × 100. This measures net profit margin as a percentage of revenue after all expenses.
What Profitability Ratio Means
- 20%+ (Excellent): Very profitable. Strong pricing power or excellent cost control.
- 10-20% (Good): Healthy profitability. Good balance of revenue and expenses.
- 5-10% (Fair): Moderate profitability. May need to improve margins or reduce expenses.
- Below 5% (Poor): Low profitability. May struggle to cover expenses or grow.
How to Improve Profitability Ratio
- Increase revenue through marketing and business expansion
- Reduce expenses via cost-cutting and operational efficiency
- Raise prices when market conditions allow
Frequently asked questions
What's a good profitability ratio?
Generally 10-20% is considered good for most small businesses, though service businesses typically range 15-30% while retail and restaurants operate at 3-7%.
How does profitability ratio affect loan approval?
Lenders check profitability ratios to assess your ability to generate profit and repay loans. Higher ratios improve approval chances.
Ready to get funded?
Apply once and get a clear funding offer in 24–72 hours — no hard credit pull to pre-qualify.
Apply Now — It's Free →