Daffodil International University

Faculties and Departments => Business & Entrepreneurship => Business Administration => Topic started by: Md. Al-Amin on March 08, 2014, 03:17:31 PM

Title: Profit Margin
Post by: Md. Al-Amin on March 08, 2014, 03:17:31 PM
Profit Margin

Profit margin usually refers to the percentage of revenue remaining after all costs, depreciation, interest, taxes, and other expenses have been deducted. The formula is:

(Total Sales - Total Expenses)/Total Sales = Profit Margin

Note that preferred stock dividends are typically included in the calculation, but common stock dividends are not.

How it works/Example:

Here is some information about Company XYZ for last year:



Using the formula and the information above, we can calculate that Company XYZ's profit margin was:

($1,000,000 - $500,000 - $300,000 - $100,000 - $5,000 + $1,000 - $10,000 - $10,000)/$1,000,000 = $76,000/$1,000,000= 7.6%

Why it Matters:

Profit margin is one of the most analyzed numbers a company can produce, and it plays a part in many other financial measures. It is important to understand that profit margin is not a measure of how much cash a company earned during a given period. The income statement, and hence profit margin, typically includes noncash expenses, such as depreciation. It is also important to understand that changes in accounting methods can greatly influence profit margins, and these changes may have little to do with a company's actual operations.

Changes in profit margins are the subject of much analysis. In general, low profit margins could suggest myriad problems, from inadequacies in customer or expense management to unfavorable accounting methods. However, some companies strive to minimize taxes and will therefore intentionally minimize profit margins.

Profit margin varies greatly between companies and industries. Care should also be taken when comparing profit margin over time, as many companies and industries are cyclical. This is why comparisons are generally most meaningful among companies within the same industry, and the definition of a "high" or "low" net income should be made within this context.

http://www.investinganswers.com/financial-dictionary/businesses-corporations/profit-margin-5116
Title: Re: Profit Margin
Post by: sajib on March 09, 2014, 11:09:31 AM
    
Definition of 'Profit Margin'

A ratio of profitability calculated as net income divided by revenues, or net profits divided by sales. It measures how much out of every dollar of sales a company actually keeps in earnings.

Profit margin is very useful when comparing companies in similar industries. A higher profit margin indicates a more profitable company that has better control over its costs compared to its competitors. Profit margin is displayed as a percentage; a 20\% profit margin, for example, means the company has a net income of $0.20 for each dollar of sales.

http://www.investopedia.com/terms/p/profitmargin.asp

Title: Re: Profit Margin
Post by: munna99185 on March 09, 2014, 11:52:46 AM
Profit margin is calculated with selling price (or revenue) taken as base times 100. Profit margin is the percentage of selling price that turned into profit, where as "Profit Percentage" or "Markup" is the percentage of cost price that one gets as profit on top of cost price. So while selling something one should know what percentage of profit will he get on a particular investment so companies calculate profit percentage to check what is ratio of profit on the basis of cost. The profit margin is mostly used for internal comparison. [Source: Wikipedia.com]

Sayed Farrukh Ahmed
Assistant Professor
Faculty of Business & Economics
Daffodil International University