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.
- 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.
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.
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.