Profit Margin

By a Wide Margin

What is the profit margin?

The profit margin represents the profitability of a company.

It is the percentage of every dollar of sales a company keeps. For example, if a company has a 10% profit margin, it has made 10 cents for each dollar it brings in.

Another way to think of it is the percentage of profit remaining after all costs and other expenses have been deducted.

 

How to calculate

To find the profit margin percentage, first you must find the net income, which is all the money left after you deduct all expenses and costs:

profit-margins-2

 

 

profit-margins-1-1-final-png

 

Once you have the net income, you can calculate the profit margin:

profit-margins-1-2-final

Why important?

The profit margin is a helpful way of determining whether or not a business is doing well. It is often used by investors to measure the success or failure of a business and how well it is doing compared with others in the same industry.

Profit Margins Across Industries

 


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Why just looking at revenues can be misleading

As you can see from the chart below, it is difficult to know how well a company is doing without looking at the profit margin.

 

profit-margins-3-final

Do I want the profit margin to be high or low?

The higher, the better.

How can I increase my profit margin?

  • Lower the cost of goods sold
  • Increase marketing to increase overall sales/revenue
  • Increase the pricing on each unit sold

Other important ratios:

  • Gross Profit Margin = (Revenue – Cost of Goods Sold)/Revenue
  • Operating Profit Margin = EBIT/Sales
  • Net Profit Margin = Net Profits after Taxes/Revenue

Fun facts:

  • The most profitable industries in the United States are pharmaceuticals and banks, making them the most publicly traded industries in the world.
  • Although Walmart made $100 billion more than any other company in the U.S. in 2014, its profit margin was just 3%.
  • There is no need to look at the profit margin of a business that is losing money because it’s not making a profit!

Link to Profit Margin Calculator: https://www.omnicalculator.com/business/margin

References

  1. http://www.inc.com/encyclopedia/profit-margin.html
  2. http://www.investopedia.com/terms/p/profitmargin.asp
  3. http://quickbooks.intuit.com/r/cash-flow/4-ways-to-increase-your-profit-margins/
  4. http://www.fool.com/investing/value/2015/07/19/7-facts-you-probably-dont-know-about-big-pharma.aspx
  5. https://business.linkedin.com/talent-solutions/blog/2015/06/11-fascinating-facts-about-the-fortune-500
  6. http://www.investmentu.com/article/detail/989/20051103

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