Profitability: Interpretations and Considerations

  • David Walters
  • Deborah Helman


Profitability has many interpretations, often competing with other metrics as a means of measuring corporate performance. The DuPont ratio spread is explored in this chapter as useful in identifying meaningful interpretations across a range of interests: strategic effectiveness, investment strategy, operating efficiency, and shareholder returns. However, there are differing views on what comprises “profit.” It has been argued that while organizations appraise success by size of sales, or share price performance, market share, return on a measure of investment, or perhaps sales or growth rate, a realistic measure of corporate success is value added, a derivative of economic profit. To be of use as a performance metric, added value requires to be quantified. Operating margins are one indication of value that is added at each stage of production. However, this has problems. One problem concerns the charge made for the use of capital in the production process. Here the concept of economic profit can be used. Economic value added (EVA) is a financial management technique developed by Stern Stewart Inc, a financial consultancy that built upon earlier conceptual work. Other topics having an influence on profitability include cost driver analysis, total cost of ownership, and the importance of cross business network synergies. This chapter uses relevant finance and investment applications together with Industrié 4.0 and Value Chain Network 2.0 characteristics to demonstrate how finance and investment management can deliver successful stakeholder value management and introduces the notion of value contribution. Volkswagen uses value contribution as “a key measure of operating efficiency” and is calculated based on the operating result after tax and the opportunity cost of invested capital. The operating result shows the economic performance of the organization.


  1. Bamford, J., & Ernst, D. (2004, August). Managing an alliance portfolio. McKinsey Quarterly, 3, 28–39.Google Scholar
  2. Boyd, T. (2016). CEO outlook poll. The Australian Financial Review. Retrieved from:
  3. Ellis, J. (1999). Doing business in the knowledge based economy. Amsterdam: Pearson Education.Google Scholar
  4. Freeman, R. E. (1984). Strategic management: A stakeholder approach. Boston: Harper Collins.Google Scholar
  5. Gadiesh, O., & Gilbert, J. L. (1998, May-June). Profit pools: A fresh look at strategy. Harvard Business Review, 76, 139–147.Google Scholar
  6. Kay, J. (1993). Foundation of corporate success. Oxford: Oxford University Press.Google Scholar
  7. Mitchell, S. (2014). Amcor says new plastic packaging technology cuts costs. The Australian Financial Review. Retrieved from:
  8. Neely, A., Adams, C., & Kennerley, M. (2002). The performance prism: The scorecard for measuring and managing business success. London: Financial Times/Prentice- Hall.Google Scholar
  9. Porter, M., & Kramer, M. (2011, Jan-Feb). Creating shared value. Harvard Business Review, 89, 62–77.Google Scholar
  10. Quirk, B. (2011, July 4). How smart companies avoid getting burned by wild dollar swings. Fortune, 164, 32.Google Scholar
  11. Slywotzky, A. J., & Morrison, D. J. (1997). The profit zone. New York: Wiley.Google Scholar
  12. Volkswagen Group. (2013). Volkswagen Group Annual Report. Retrieved from:
  13. Walters, D., & Rainbird, M. (2007). Strategic operations management. Basingstoke: Palgrave.CrossRefGoogle Scholar

Copyright information

© Springer Nature Switzerland AG 2020

Authors and Affiliations

  • David Walters
    • 1
  • Deborah Helman
    • 2
  1. 1.University of Technology SydneySydneyAustralia
  2. 2.DeVry UniversityNorth BrunswickUSA

Personalised recommendations