Profit Range

Profit Range refers to the range of prices which return a profit for a business or on a security. People typically use this term to describe businesses or securities with two break-even points, a downside break-even point as well as an upside break-even point, and Profit Range describes the range between the two.

A Profit Range can be a useful metric for investors to compare against the volatility of an underlying asset when designing an investment strategy. In most circumstances, solid investment strategies will match profit ranges with appropriate volatilities. Large profit ranges should usually be matched with high volatility assets, while smaller profit ranges should be matched with lower volatilities. Mismatches between volatility and profit range tend to lead to losses on a position.

The volatility of a security is associated with the amount of uncertainty or risk associated with the value of that security. A high volatility security can change drastically over a short period of time, which can be attractive to investors looking for a fast, high return on an investment. Risk-averse investors would tend to be more attracted to lower volatility securities with steady performance.

A break-even point is the point at which total revenue and total cost of doing business are equal, resulting in neither gain nor loss. Monitoring the break-even point for a business has a number of useful strategic applications, including assessing capacity and maximum profits after expenses are covered, as well as determining the amount of loss a company can sustain in the event of a downturn.

A break-even point is calculated by dividing total fixed expenses by the contribution margin, which is the margin between sales and total variable costs.

Break-even analysis relies on scrutiny of the contribution margin. Since fixed costs do not fluctuate the way that sales or variable costs do, they represent a constant foundation within the operating costs for a business. Break-even analysis examines demand and price levels to determine the most desirable outcomes for production and sales.

A downside break-even point will be determined by the least desirable circumstances in controlling variable costs while remaining viable in the marketplace, while an upside break-even point will be determined by the most desirable variable costs in relationship to overall sales income.

Profit Range is determined once the upside and downside break-even points are defined, suggesting that in many cases the Profit Range is closely associated with the associated variable costs.