Thursday, February 2, 2012

Profitability Ratios #2: Profit Margin (Gross & Net)


Profit Margin

Measures the profit genereted from sales (per £ of sales)


The Formula


 


Depending on what information you have available to you will determine how you calculate the top line of the equation.

Gross profit can be:

EBIT + Admin Expenses
Operating Profit + Admin Expenses
Turnover – Cost of Sales
Gross Profit


Net Profit can be:

Gross Profit – Admin Expenses
EBIT
Operating Profit
Net Profit



Example

Balance Sheet

Turnover
200m
Cost of Sales
157m
Gross Profit
70m

Administration expenses
20m
Operating Profit (Earnings before interest and taxes)
50m



Solution



Gross Profit Margin
































Net Profit Margin






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