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What Are Profitability Ratios?

  • Writer: Admin
    Admin
  • Jun 11
  • 3 min read

A Straightforward Guide for Founders Who Want to Build Real Profit


When people ask, “What are profitability ratios?” — they’re really asking: Is my business actually making money… or just making sales?


At Blaze Group, we help founders answer that question clearly — and take action based on what the numbers reveal.



What Are Profitability Ratios?


Profitability ratios are financial metrics that measure how efficiently a business turns revenue into profit.


They help you assess the real health of your business — not just how much money is coming in, but how much you’re keeping after covering your costs.


Unlike vanity metrics (like follower count or gross revenue), profitability ratios tell you if your business model is sustainable and scalable.



Why Profitability Ratios Matter for Small Business Owners


If you’re a service provider, product seller, creative, or coach — profitability ratios help you answer core questions:

  • Is my pricing too low?

  • Are my operating costs too high?

  • Is this business model scalable?

  • Am I paying myself enough to make this worth it?


You don’t need an MBA to understand your numbers. You need simple tools, plain-language definitions, and a rhythm of review that keeps your business honest.



3 Profitability Ratios Every Founder Should Know


Here are the top three profitability ratios we help Blaze Group founders track:


1. Gross Profit Margin (%)

  • Formula: (Revenue – Cost of Goods Sold) / Revenue × 100

  • What it means: How much money is left after covering the direct costs of delivering your product or service — like ingredients, packaging, or subcontractors.

  • Point of Caution: If your margin is under 30%, you may not have enough room to pay yourself or reinvest in the business.


2. Operating Profit Margin (%) — aka Earnings Before Interest & Taxes (EBIT) Margin

  • Formula: Operating Income / Revenue × 100

  • What it means: This shows how profitable your business is after operational expenses but before taxes and interest. It factors in costs like rent, tools, subscriptions, and team.

  • Point of Caution: A low operating margin could mean bloated overhead or inefficient workflows.


3. Net Profit Margin (%)

  • Formula: Net Profit / Revenue × 100

  • What it means: This is your bottom line. It's a view of the percentage of revenue (or money) that is actually left over after all expenses are paid — including your taxes and debt repayments.

  • Point of Caution: This is a key ratio that lenders and investors will look at to assess your company's financial viability.



How to Use Profitability Ratios in Your Business


Tracking your margins isn’t just about math — it’s about movement. These ratios help you:

  • Set pricing that protects your peace and your pockets

  • Spot cost leaks that are killing your bottom line

  • Build confidence in conversations with funders or lenders

  • Decide when (and how) to scale without burning out or going broke



Real-World Example


Let’s say you made $8,000 last month.

  • Your product costs $3,000 to deliver → Gross Profit Margin = 62.5%

    • $8,000 - $3,000 = $5,000 (Gross Profit)

    • $5,000 / $8,000 = 62.5% (Gross Profit Margin)

  • Your operating costs (marketing, software, shipping) totaled $2,500 → Operating Margin = 31.25%

    • $8,000 - $3,000 - $2,500 = $2,500 (Operating Profit)

    • $2,500 / $8,000 = 31.25% (Operating Profit Margin)

  • After taxes and loan payments, you kept $1,500 → Net Profit Margin = 18.75%

    • $8,000 - $3,000 - $2,500 - $1,000 = $ 1,500 (Net Profit)

    • $1,500 / $8,000 = 18.75% (Net Profit Margin)


That’s a strong foundation to grow from.


But if your Net Profit Margin is under 10% consistently, it’s time to reassess your pricing or cut back expenses.



Ready to Track Your Profitability Without the Stress?


Inside the Blaze Group App, we’ve built easy-to-access courses, tracking tools, and journal prompts to help you:

  • Log your key performance indicators

  • Learn new ways to optimize financial health

  • Reflect on what needs to shift in your business

  • Align your pricing to economic value


No pressure, no overwhelm — just simple systems that work.



Final Word

Profitability ratios are more than just numbers — they’re your early warning system, your pricing truth serum, and your guide to building a business that doesn’t just survive… but thrives.


Whether you’re bootstrapping, scaling, or somewhere in between — know your numbers. Then move accordingly.

 
 
 

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