The two primary methodologies organizations, analysts and Wall Street use to measure profitability are the Internal Rate of Return (IRR) and Rate of Return on Net Assets (RONA), because by describing profitability as ratios it allows us to neutralize differences and compare the profitability between different industries. Today we’re seeing several sectors of the western economy, such as manufacturing, assembly and engineering decline as many of the world’s largest first world organizations progressively outsource cost intensive segments of their businesses to the tiger economies and risk becoming nothing more than high margin, damaged marketing agencies who have outsourced everything but their brand. As such the pursuit of higher profit margins, rather than the pursuit of voluminous profits becomes the dominant behavior. This is what Apple (AAPL) and its shareholders found out to their peril when the stock plummeted from it’s high of $700 to a value of $566, wiping out over $150 Billion of shareholder value.Ĭompany executives are increasingly compelled to report profit in percentage terms so naturally they promote and reward the behaviors that increase margins. But while profitability is one of your organizations biggest motivators, the unchecked pursuit of it can eventually destroy shareholder value and create your next, fiercest competitor. Profitable companies can invest and acquire while unprofitable ones slowly sink into the abyss of Chapter 11.
No other metric is more important to an organization than its profitability.
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