What is Profit Margin?
(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 Does Profit Margin Work?
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 Does Profit Margin Matter?
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 accounting methods can greatly influence profit margins, and these changes may have little to do with a company's actual operations.a company earned during a given period. The , and hence profit margin, typically includes noncash expenses, such as . It is also important to understand that changes in
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 minimizeand 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"should be made within this context.
Personalized Financial Plans for an Uncertain Market
In today’s uncertain market, investors are looking for answers to help them grow and protect their savings. So we partnered with Vanguard Advisers -- one of the most trusted names in finance -- to offer you a financial plan built to withstand a variety of market and economic conditions. A Vanguard advisor will craft your customized plan and then manage your savings, giving you more confidence to help you meet your goals. Click here to get started.
Read This Next
With the foreclosure market what it has been in recent years, we kept hearing horror stories about the insane things people do to their homes when they face eviction....Read More →
Warren Buffett is one of the few investors who has achieved truly cult-like status. Fondly known as the "Oracle of...Read More →