How do businesses measure profitability?

Businesses measure profitability by comparing total revenue to expenses, as this evaluation provides clear insight into how much money the business is making after accounting for its costs. Profitability is defined as the difference between revenue generated from sales and the costs incurred in producing goods or providing services. When total revenue exceeds expenses, the business is profitable; when expenses are greater, it incurs a loss.

This method directly reflects the efficiency and effectiveness of the business operations, allowing for strategic decisions regarding pricing, cost management, and investment. Understanding profitability is crucial for business sustainability and growth, as it helps management assess performance against competitors and market conditions.

The other options, while they may provide valuable information about various aspects of a business's health or operational efficiency, do not specifically focus on profitability. For example, analyzing the number of employees can give insights into workforce productivity but does not relate directly to measuring profit. Similarly, calculating total assets owned reflects a company’s financial strength but not its ability to generate profit. Assessing market trends might help provide context for sales performance, but again, it is not a direct measure of profitability. Thus, the correct focus on revenue and expenses is fundamental to understanding a business's profitability.