3.2. Profitability Metrics

A company’s profitability, simply stated, is its ability to convert revenues into profit. A company’s absolute and relative profitability is a critical measure of the company’s value.

In analyzing a company’s absolute and relative profitability, it is often necessary to adjust for extraordinary and nonrecurring items. Such items could include, for example, the acquisition of another company, a major casualty loss, the purchase or sale of a significant asset, the impact of a court judgment, or a change in accounting procedures. These types of expenses (or gains) could skew a compan