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. Benefit Cost Ratio - BCR

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

    A valuation method used to estimate the attractiveness of an ...
  4. Present Value - PV

    The current worth of a future sum of money or stream of cash ...
  5. Future Value - FV

    The value of an asset or cash at a specified date in the future ...
  6. Cash Flow

    1. A revenue or expense stream that changes a cash account over ...
RELATED FAQS
  1. How does transfer pricing help business?

    Transfer pricing involves the trade of goods or services between two related companies, and both can come out the winner. ... Read Full Answer >>
  2. How do you use the profitability index rule when scoping out a project?

    As businesses grow, they look for new opportunities to expand operations. Whether it is launching a new product or moving ... Read Full Answer >>
  3. What is the relationship between marginal return and profitability?

    Companies assess their business practices and financial management from numerous angles in the quest to maximize profitability. ... Read Full Answer >>
  4. 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 ... Read Full Answer >>
  5. Why should investors research the C-suite executives of a company?

    C-suite executives are essential for creating and enacting overall firm strategy and are therefore an important aspect of ... Read Full Answer >>
  6. How are C-suite officers measured on performance?

    Evaluation of C-suite officers, especially the chief executive officer (CEO), is an important element of fundamental analysis. ... Read Full Answer >>
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. Fundamental Analysis

    Calculating Future Value

    Future value is the value of an asset or cash at a specified date in the future that is equivalent in value to a specified sum today.
  3. Economics

    What is Deadweight Loss?

    Mainly used in economics, deadweight loss can be applied to any deficiency caused by an inefficient allocation of resources.
  4. Economics

    How to Do a Cost-Benefit Analysis

    The benefits of a given situation or business-related action are summed and then the costs associated with taking that action are subtracted.
  5. Investing

    Apple or Google: Which is the Better Bet?

    Apple and Google have made many investors rich since the turn of the century. Which is more appealing going forward?
  6. Fundamental Analysis

    Calculating the Herfindahl-Hirschman Index (HHI)

    The Herfindhal-Hirschman Index, (HHI) is a measure of market concentration and competition among market participants.
  7. Fundamental Analysis

    Calculating Net Interest Margin

    Net interest margin is a metric used to measure the effectiveness of a company’s investment decisions, particularly financial institutions.
  8. Investing

    How To Implement A Smart Beta Investing Strategy

    Smart beta investing is the notion of re-writing investment rules to improve investment outcomes by targeting exposures to intuitive ideas or factors.
  9. Fundamental Analysis

    How Microsoft & Apple's Balance Sheets Compare

    Looking at two iconic companies, Microsoft and Apple, whose balance is sheet is stronger and where?
  10. Fundamental Analysis

    Key Financial Ratios for Pharma Stock Investing

    Analysts simplify the business of investing in pharma by studying key financial ratios and metrics. Know these metrics before you buy or sell pharma.

You May Also Like

Hot Definitions
  1. Butterfly Spread

    A neutral option strategy combining bull and bear spreads. Butterfly spreads use four option contracts with the same expiration ...
  2. Unlevered Beta

    A type of metric that compares the risk of an unlevered company to the risk of the market. The unlevered beta is the beta ...
  3. Moving Average - MA

    A widely used indicator in technical analysis that helps smooth out price action by filtering out the “noise” from random ...
  4. Yield Curve

    A line that plots the interest rates, at a set point in time, of bonds having equal credit quality, but differing maturity ...
  5. Productivity

    An economic measure of output per unit of input. Inputs include labor and capital, while output is typically measured in ...
  6. Variance

    The spread between numbers in a data set, measuring Variance is calculated by taking the differences between each number ...
Trading Center