Profitability
Learn what profitability means, how to measure it with key ratios, and how to lift your margins.
June 2023 | Published by Xero
Published Wednesday 30 September 2026
Table of contents
Key takeaways
- Profitability shows how much of each dollar of revenue your business keeps as profit, which tells you more than the dollar figure alone
- Profitability ratios, including gross and net profit margin, each reveal a different layer of your financial health
- A 10% net margin is often called healthy, but good margins vary widely by industry, so compare against your own trends and relevant benchmarks
- You can lift your margins by reviewing prices, trimming costs, automating admin and checking results regularly, while planning for cash flow and corporate tax
What is profitability?
Profitability is how well your business turns revenue into profit, shown as a percentage or ratio. It tells you how much of each sale you keep after covering your costs.
Think of it like fuel efficiency. Two cars can cover the same distance, but the one using less petrol is running better. To work out your profitability, divide profit by revenue:
- Profitability = (Profit ÷ Revenue) × 100
Say your business earns S$500,000 in revenue and keeps S$75,000 as net profit. Your profitability (net profit margin) is 15%, so you keep 15 cents from every dollar of sales.
Profit vs profitability
Profit is the dollar amount you keep after expenses, while profitability is the share of revenue that becomes profit. Here’s how two businesses compare:
- Business A earns S$2 million in revenue and keeps S$100,000 in profit, a 5% margin
- Business B earns S$400,000 in revenue and keeps S$80,000 in profit, a 20% margin
Business A makes more profit in dollars, but Business B is far more profitable. Business B keeps 20 cents of every dollar it earns, compared with 5 cents for Business A.
That gap shapes your growth plans, since a higher margin means each new sale adds more to your bottom line. Most owners aim to grow total profit while holding or lifting their margin.
Why profitability matters
Profitability shows whether your business model can sustain itself over time. When your margins are healthy, you can reinvest in growth and build a cash buffer for quieter months.
Tracking it regularly helps you:
- see how efficiently you’re operating, since a higher margin means you need less revenue to earn a good income
- make pricing, hiring and investment decisions based on what’s driving your returns
- show lenders and investors the ratios they check before approving finance
- spot early warning signs, such as margins shrinking while revenue stays flat
Very high margins deserve a second look too. Prices well above the market can slow sales over time. Aim for a margin that supports both healthy profit and steady demand.
What is a good profitability percentage?
A good profitability percentage depends on your industry, though a net profit margin of around 10% is widely seen as healthy. As a rule of thumb from Brex, a 5% net margin is low, 10% is healthy and 20% is high.
Industry figures show how wide the spread can be. The NYU Stern margins by sector dataset puts the average net margin for US publicly listed companies at 9.74% across the total market, using data as of January 2026. Average net margins in the same dataset include:
- 1.32% for grocery and food retail
- 5.61% for general retail
- 7.03% for business and consumer services
- 9.37% for restaurants and dining
- 25.49% for system and application software
These are averages for US listed companies, so margins for Singapore small businesses may differ. Treat them as a rough guide.
Factors that affect profitability
Your profitability depends on a handful of factors, and most of them are within your control. Knowing which ones move your margins shows you where to focus first.
Pricing strategy
Your prices set the ceiling for your margins. Price too low and you may win customers but struggle to cover costs; price too high and sales may slip.
Cost of goods sold
Your cost of goods sold (COGS) is what you spend producing or buying the things you sell. It has one of the biggest effects on your gross margin. Better supplier terms and bulk buying can both lift that margin.
Operating expenses
Rent, utilities, insurance, marketing and admin all reduce your profit. Audit your overheads regularly to find costs you can trim while keeping quality high.
Customer demand and sales volume
Higher sales volume can lift profitability when your fixed costs stay stable. Heavy discounting to chase volume can shrink margins, though, so check that extra sales are adding to your bottom line.
Competition
Competitors can push you to lower prices or spend more on marketing. Standing out through better service or specialist expertise helps protect your margins.
Productivity and efficiency
The more efficiently your team works, the more output you get from each dollar spent on labour. Training and software that automates repetitive tasks both help.
Scale
As your business grows, you can spread fixed costs across more revenue, which is known as economies of scale. Growth also brings new costs, such as extra staff or bigger premises, so track whether scaling is improving your margins.
How to measure profitability
You measure profitability with a set of profitability ratios, each showing a different layer of your financial performance. The figures you need sit on your profit and loss statement and balance sheet.
Gross profit margin
Your gross profit margin is the percentage of revenue left after you subtract the direct costs of delivering your products or services. Calculate it with this formula:
- Gross profit margin = ((Revenue − COGS) ÷ Revenue) × 100
Say your business earns S$300,000 in revenue and your COGS is S$180,000. Your gross profit is S$120,000, so your gross profit margin is (S$120,000 ÷ S$300,000) × 100 = 40%. You keep 40 cents from every dollar of sales before operating expenses, which shows how efficiently you produce or source what you sell.
Net profit margin
Net profit margin is the percentage of revenue left after every expense, including COGS, operating costs, interest and tax. Calculate it with this formula:
- Net profit margin = (Net profit ÷ Revenue) × 100
Using the same S$300,000 in revenue, say your COGS is S$180,000, operating expenses are S$60,000, interest is S$4,000 and tax is S$9,520. Your net profit is S$46,480, so your net profit margin is (S$46,480 ÷ S$300,000) × 100 = about 15.5%.
A net profit margin calculator can do the maths for you.
Operating profit margin
Operating profit margin is the percentage of revenue left after COGS and operating expenses, before interest and tax. Calculate it with this formula:
- Operating profit margin = (Operating profit ÷ Revenue) × 100
With revenue of S$300,000, COGS of S$180,000 and operating expenses of S$60,000, your operating profit is S$60,000. Your operating profit margin is (S$60,000 ÷ S$300,000) × 100 = 20%. Because it leaves out financing and tax, it shows how well your core operations perform.
Return on assets (ROA)
Return on assets (ROA) shows how much profit your business earns from the assets it owns. Calculate it with this formula:
- ROA = (Net profit ÷ Total assets) × 100
If your net profit is S$46,480 and your total assets are S$500,000, your ROA is (S$46,480 ÷ S$500,000) × 100 = about 9.3%. Every dollar of assets earns roughly 9 cents of profit, which helps you judge whether spending on equipment, vehicles or stock is paying off.
Return on equity (ROE)
Return on equity (ROE) measures the profit your business earns relative to the money its owners have put in. Calculate it with this formula:
- ROE = (Net profit ÷ Owners’ equity) × 100
If your net profit is S$46,480 and owners’ equity is S$200,000, your ROE is (S$46,480 ÷ S$200,000) × 100 = about 23.2%. You can compare that return with other ways you could invest the same money.
Earnings before interest, taxes, depreciation and amortisation (EBITDA)
EBITDA adds interest, taxes, depreciation and amortisation back to net profit to show what your core operations earn. Calculate it with this formula:
- EBITDA = Net profit + Interest + Taxes + Depreciation + Amortisation
Take the net profit example above and say it includes S$10,000 in depreciation and S$2,000 in amortisation. Your EBITDA is S$46,480 + S$4,000 + S$9,520 + S$10,000 + S$2,000 = S$72,000. It’s handy for comparing companies with different financing or asset structures.
How to evaluate profitability over time
You evaluate profitability over time by calculating the same ratios for matching periods and comparing the results. Follow these steps to spot trends early:
- Choose a regular reporting period, such as monthly or quarterly, and stick with it
- Run a profit and loss report for each period, using a profit and loss template if you work in spreadsheets
- Calculate your key margins, such as gross and net profit margin, for each period
- Compare each period with the same period last year to allow for seasonal swings
- Follow the direction of each margin across at least four periods, since a steady decline tells you more than one weak month
- Dig into the line items behind any change, such as rising supplier prices or staff costs growing faster than sales
- Set a target margin for the next period and review your progress against it
Profitability vs cash flow
Profitability measures what you earn over a period, while cash flow tracks the money moving in and out of your bank account. The two often move at different speeds, so a business can be profitable on paper and still run short of cash.
Picture a design studio that invoices S$40,000 in March on 60-day terms. The sale counts towards March profit, but the cash arrives in May, while rent and salaries fall due every month. Common reasons profit and cash drift apart include:
- customers paying on long credit terms or paying late
- cash tied up in stock before it sells
- loan repayments, which reduce cash but sit outside your profit and loss
- equipment purchases, which leave your account at once but reach your expenses gradually through depreciation
A cash flow forecast helps you see these gaps coming. You can then plan for them while keeping your margins on track.
Profitability and corporate tax in Singapore
Corporate tax comes out of your profit, so it directly shapes your net profit margin. According to IRAS, companies in Singapore pay a flat 17% on chargeable income, whether they’re local or foreign.
In the net profit example, profit before tax of S$56,000 gives a tax bill of S$9,520 at that headline rate. Your actual bill depends on your chargeable income after tax adjustments, plus any exemptions or rebates you qualify for.
Check the IRAS website for any corporate income tax rebate for the current Year of Assessment (YA), and build it into your after-tax forecasts. When you want to judge day-to-day performance, look at operating profit margin, since tax changes won’t distort it.
How to improve profitability
You improve profitability by growing revenue, cutting costs or doing both. These strategies suit most small businesses.
Review your pricing
Check whether your prices still reflect your costs and the value you deliver. Compare them with what competitors charge, since even a small increase can lift your margins noticeably.
Cut unnecessary costs
Go through your expenses line by line. Look for subscriptions you don’t use and suppliers you could renegotiate with, since small savings add up quickly.
Improve your sales mix
Some products or services earn much better margins than others. Focus your marketing on your highest-margin offerings, and consider phasing out low-margin lines that take up time without adding much profit.
Automate repetitive tasks
Manual admin takes time you could spend on revenue-generating work. Software that handles invoicing, bank reconciliation, expense tracking and payment reminders frees up those hours.
Track projects against budgets
If you run a service business, scope creep can quietly eat into margins. Set a budget for each project and track actual costs against it. Agree extra fees before you start any out-of-scope work.
Monitor your margins regularly
Build a margin check into your routine well before the end of the financial year. Regular reviews help you spot trends and act while issues are still small.
Track your profitability with Xero
Tracking profitability is easier when your numbers are current. With Xero, you can run real-time profit and loss reports and other financial reports whenever you need them.
Bank feeds and automated bank reconciliation keep your figures up to date. Xero Analytics Plus helps you spot margin trends over time, so you can make confident decisions about pricing and costs. Try Xero today and get one month free.
FAQs on profitability
Here are answers to common questions about profitability.
What is another word for profitability?
Depending on the context, you might see terms like profit-making ability, earning power or margin performance. In financial reports, it’s usually discussed through specific measures such as net profit margin or return on equity.
How do you benchmark your profitability against your industry?
Start with your own past results, then compare your margins with published industry datasets, keeping in mind they may cover larger or overseas companies. Your accountant can also tell you how similar Singapore businesses tend to perform.
Can a business be profitable but still fail?
Yes, fast growth can drain cash when you pay suppliers and staff before customers pay you. Healthy profits can also mask heavy debt or reliance on one or two big clients.
How often should you measure profitability?
Monthly reviews suit most small businesses, with a deeper look at trends and ratios each quarter. If cash is tight or you’re growing quickly, a weekly check on sales and gross margin gives you earlier warning.
When should you seek professional advice about profitability?
Speak to an accountant if your margins have fallen for several quarters with no clear cause. It’s also worth getting advice before big moves like raising prices or taking on a loan.
Related terms
Learn more about profitability
Handy resources
Advisor directory
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P&L template
Download a P&L template to help track your profitability
Instant profitability reports
Generate key reports at the click of a mouse with Xero accounting software
Disclaimer
This glossary is for small business owners. The definitions are written with their requirements in mind. More detailed definitions can be found in accounting textbooks or from an accounting professional. Xero does not provide accounting, tax, business or legal advice.