Profitability Index

AAA

DEFINITION of 'Profitability Index'

An index that attempts to identify the relationship between the costs and benefits of a proposed project through the use of a ratio calculated as:

Profitability Index

INVESTOPEDIA EXPLAINS 'Profitability Index'

A ratio of 1.0 is logically the lowest acceptable measure on the index. Any value lower than 1.0 would indicate that the project's PV is less than the initial investment. As values on the profitability index increase, so does the financial attractiveness of the proposed project.

RELATED TERMS
  1. Net Present Value - NPV

    The difference between the present value of cash inflows and ...
  2. Cash Flow

    1. A revenue or expense stream that changes a cash account over ...
  3. Benefit Cost Ratio - BCR

    A ratio attempting to identify the relationship between the cost ...
  4. Discounted Cash Flow - DCF

    A valuation method used to estimate the attractiveness of an ...
  5. Future Value - FV

    The value of an asset or cash at a specified date in the future ...
  6. Present Value - PV

    The current worth of a future sum of money or stream of cash ...
Related Articles
  1. Investing Basics

    Understanding The Time Value Of Money

    Find out why time really is money by learning to calculate present and future value.
  2. Budgeting

    Which is a better measure for capital budgeting, IRR or NPV?

    In capital budgeting, there are a number of different approaches that can be used to evaluate any given project, and each approach has its own distinct advantages and disadvantages.All other ...
  3. Personal Finance

    What is a P&L statement used for?

    Discover how the profit and loss statement is used by investors, accountants and business managers to assess the health and business practices of a company.
  4. Investing Basics

    What is the difference between a P&L statement and a balance sheet?

    Take a deeper look at the differences between the profit and loss statement and the balance sheet, two of the most important financial accounting documents.
  5. Investing

    How does Facebook (FB) make money?

    Examine third quarter 2014 revenue data for Facebook and increases in advertising, mobile advertising, daily active users and mobile daily active users.
  6. Investing Basics

    How does Twitter (TWTR) make money?

    Learn how Twitter earns revenue, including the company's use of three targeted advertising streams and data farming and licensing.
  7. Investing Basics

    Why is it important to understand the Circular Flow Of Income when making investment decisions?

    Find out why investors should pay attention to a firm's circular flow of income model to measure its efficiency and evaluate its use of profits.
  8. Trading Strategies

    Selecting Mergers & Acquisitions Advisories For Small Businesses

    Mergers and acquisitions advisories aren't just for big players. Many advisory firms cater to small and medium businesses.
  9. Investing Basics

    What's more important, cash flow or profits?

    Learn about the different effects that cash flow and profit have on a business so you can decide which aspect to focus on.
  10. The return on Assets (ROA) and return on equity (ROE) are often used metrics to measure the returns generated by a company.
    Fundamental Analysis

    How Do Tech Companies Measure ROA And ROE?

    The return on Assets (ROA) and return on equity (ROE) are often used metrics to measure the returns generated by a company.

You May Also Like

Hot Definitions
  1. Multinational Corporation - MNC

    A corporation that has its facilities and other assets in at least one country other than its home country. Such companies ...
  2. SWOT Analysis

    A tool that identifies the strengths, weaknesses, opportunities and threats of an organization. Specifically, SWOT is a basic, ...
  3. Simple Interest

    A quick method of calculating the interest charge on a loan. Simple interest is determined by multiplying the interest rate ...
  4. Special Administrative Region - SAR

    Unique geographical areas with a high degree of autonomy set up by the People's Republic of China. The Special Administrative ...
  5. Annual Percentage Rate - APR

    The annual rate that is charged for borrowing (or made by investing), expressed as a single percentage number that represents ...
  6. Free Carrier - FCA

    A trade term requiring the seller to deliver goods to a named airport, terminal, or other place where the carrier operates. ...
Trading Center