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Profit Margin

 

Profit margin normally refers to net profit margin, which is net profit divided by sales. But one should remember that profit might be of different kinds (net profit, pretax profit, EBIT, EBITDA and gross profit) and profitability margins also may have different names. 

 

Net profit margin also can be called just ‘net margin’ and is one of the most popular profitability margins together with EBITDA margin. 

 

Profit margin calculation


Net profit margin = Net profit / Revenue


* Company’s financial data have to be of the same period that is analyzed. One-off income or cost must be eliminated from net profit and revenue.


** You may to multiple the result by 100%. 

 

The profit margin compared with margins of similar companies (in the same industry) shows how successful company’s activity in the market is. If company has higher margins than competitors it means that company has stronger position on the market or works more efficiently. However, to get clear view of profitability comparison you should compare more profitability margins, because net profit margin depends on accounting policy and other factors. 

 

If a profit margin is lower than competitors or is decreasing, it is not necessary a bad sign if company’s sales are growing significantly. It may be company’s strategy to conquer larger market share sacrificing some of the profitability (maybe company is trying to push some competitor out of the market, which is not always legal).  

 

If you are looking for stocks to invest, the profit margin is an important factor. But this factor has two implications. From one point of view higher profitability margin is good because such company is more stable (when market will be down and profit margins will decrease such company will feel it less than company that has low profit margin), but from other point of view, if company has much lower profit margin than is industry’s average, it may mean that company has potential to increase its profitability. So if you are sure that profit margin should increase, it may be good sign for investment.

 

Other profit margins: 

  • Gross margin 
  • EBITDA margin 
  • Operating margin

 

 

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