Profitability ratios are a class of financial metrics that are used to assess a business’s ability to generate earnings compared to its expenses and costs incurred during a specific period of time. Common profitability ratios used by traders are profit margin, return on assets (ROA), return on equity (ROE), and the Piotroski-F score.
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In economics, profit in the accounting sense of the excess of revenue over cost is the sum of two components: normal profit and economic profit. Normal profit is the profit that is necessary to just cover the opportunity costs of the owner-manager or of the firm's investors. In the absence of this much profit, these parties would withdraw their time and funds from the firm and use them to better advantage elsewhere. In contrast, economic profit, sometimes called excess profit, is profit in excess of what is required to cover the opportunity costs.
The enterprise component of normal profit is the profit that a business owner considers necessary to make running the business worth his or her while, i.e., it is comparable to the next-best amount the entrepreneur could earn doing another job. Particularly if enterprise is not included as a factor of production, it can also be viewed as a return to capital for investors including the entrepreneur, equivalent to the return the capital owner could have expected (in a safe investment), plus compensation for risk. Normal profit varies both within and across industries; it is commensurate with the riskiness associated with each type of investment, as per the risk-return spectrum.