# Profitability score

The profitability score is a measure of how profitable a company is. It is calculated by scoring each of the company’s profitability metrics based on their percentiles (how they fare compared to other companies).

## How is the Profitability Score calculated?

To calculate the profitability score, we calculate the percentile of each of the following growth metrics, based on the company’s performance relative to its peers:

- Net profit margin (ttm)
- ROA (ttm)
- ROCE (ttm)
- ROE (ttm)

Then, we calculate the average of these percentiles to arrive at the profitability score. The higher the profitability score, the better the company is performing relative to its peers in terms of profitability.

## Example calculation

Let’s say we’re evaluating a company with the following profitability metrics:

- Net profit margin (ttm): 20% - 90th percentile
- ROA (ttm): 15% - 80th percentile
- ROCE (ttm): 10% - 75th percentile
- ROE (ttm): 5% - 80th percentile

To calculate the profitability score, we average the percentiles:

$\text{Profitability Score} = \frac{90 + 80 + 75 + 80}{4} = \frac{325}{4} = 81$## How can investors use the Profitability Score?

The profitability score is a powerful tool for investors because it simplifies the complex task of evaluating a company’s profitability.

**Benchmarking:**Investors can compare the profitability scores of different companies within the same industry to identify leaders and laggards.**Trend Analysis:**By tracking a company’s profitability score over time, investors can spot trends and assess whether the company is improving or deteriorating in terms of profitability.**Investment Decisions:**A high profitability score might indicate a potentially good investment. Conversely, a low score could be a red flag, suggesting deeper investigation is needed.