It’s one of the profitable ratios, which is mostly used to gauge the degree to the business, or the company generates the money. Profit margin also shows the percentage in sales, which are now the profit. In other word, the Profit margin is a percentage figure which shows the income which is generated by the company on its sale.
However, there are different types that can be found in the Profit margin, but they mostly refer to the company’s net profit margin. It’s a bottom line of the company after the expenses are dedicated from the revenue, including other expenses, one-off oddities and taxes.
How to Calculate with Example and Analysis?
For the creditors and investors, the profit margin can be a helpful measure to understand how the company is efficient in converting its sales into their net income. Well, the investors needed to be sure that the company is generating enough so they can pay back the loans. For the outsiders, the profit margin can tell if the company is going well or not. Such as if the ratio is way too low, it shows that the company have the high expenses that the management need to cut off.
Also, it helps the management of the company to set the goals for the performances. Overall, the profit margins are a crucial part for the company to make sure that they are going in the right direction and for the investors to understand they are investing in profitable business.
Well, the profit margin ratio is also known as the gross profit ratio and return on sales ratio. To calculate the profit margin, it’s important to get the formula first. Well for that here is the formula for profit margin:
Profit Margin Ratio = Net income / Net Sales
To understand the formula better, here is the example too:
If the company’s last year sales are $1,000,000 and the net income is $100,000. How can the profit margin of the company be calculated?
Well, the equation of the profit margin calculation will be:
Profit Margin = $100,000/ $1,000,000
So, the profit margin of the company will be 10% which means the company turned the sales into their profits by 10%
Analyses of the Profit Margin:
The profit margin is direct, measuring the sales percentage that is made up of the net income. In other words, profit margin directly shows the percentage of the profit which is generated at some level of the complete sales.
Apart from that, it also measures the company’s management regarding its expenses to its net sales indirectly. Because of that, the company looks to achieve higher ratios in Profit margin. However, it can be done, but for that, they have to generate more revenue to keep the expenses constant. If not, then it’s important to keep the revenue constant and expenses lower.
Also, like other profitability ratios, Profit Margin can be best to get comparing the companies that are from the same industry. Not just that, the profit margin can be beneficial to do the performance measuring of the company in the past.