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Charles A. Jaffe

Investment Dictionary

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Profit is a term used in various finance fields and may have many meanings. Basically profit is the positive difference between the income and costs. If costs are higher than income, then instead of profit loss will be incurred. Profit is synonym for earnings and income and all those terms mostly are used to describe financial results of the companies. 


When companies’ results are analyzed, many types of profit can be encountered: 


Profit is a key financial indicator for every company. The more company is profitable the higher return (return on equity and return on assets) will be received by company’s shareholders. Of course, larger corporations are expected to have higher profits and if company’s effectiveness is to be measured, then profit margin should be compared to profit margins of similar businesses. It is natural that some sectors are more profitable while others less. Usually higher profit margins are produced by businesses that need more investments in to the assets.


Profit means almost everything for shareholders of the business. Of course, revenue and other indicators are also important, but profit is crucial over long term. High profits means that business is successful and is worth invested capital and maybe is worth to expand. If there are no profits, profits are less than expected or company is at loss, that could indicate that something is wrong with the company’s activity and some changes must be implied, or if it is not possible then maybe business should be sold or shut down. 


Profit is very important for stock investments because most of the valuation multiples depends on some kind of profit and the higher are the profits the more attractive will look valuation multiples. Profit of the company can be found in company’s income statement.



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