Instructions on how to calculate profit margin are simple and easy to understand

What is profit margin?

Profit ratio is the ratio between profit and total investment capital used in a certain period. Based on this profit ratio, the company can calculate the actual profitability of the business as well as the net profit of investing shareholders.

Instructions on how to calculate profit margin in the simplest and most detailed way

Currently, there are two most important profit ratios: profit ratio on revenue and profit ratio.

How to calculate profit margin over revenue

It is the profit ratio on revenue used to monitor the profitability of a business. It reflects the relationship between net profits for investors and company revenue.

Based on this profit-to-revenue ratio, investors can accurately grasp the development situation of the business. And determine how much profit you earn and how much capital you spend. From there, there will be a plan to adjust the business's operations to the most suitable level.

In each period, the revenue profit margin will change and you should rely on that to guide business development.

Calculation formula: ROS= (Profit after tax / revenue profit) x 100

How to calculate profit rate

Profit rate is the ratio between the total profit earned and the total invested capital in a certain period of time. A term here can be one month, six months, one quarter, one year,...

Return ratios are divided into two types: return on assets and return on equity:

Formula to calculate return on equity (ROE)= (Profit after tax / equity) x 100
Formula to calculate return on assets (ROA) = (Profit after tax/total assets) x 100

Summary of profit margin types

Profit margin is the difference between the selling price of a product and the production and consumption costs. This gross profit will depend on the surplus calculated in % of costs to determine the selling price.

Currently divided into 3 types: Gross profit margin, net profit margin, operating profit margin.

Simple and easy-to-understand instructions on how to calculate profit margin

Gross profit margin

Is the difference between revenue and cost of sold products. Gross profit margin shows the amount of profit a business earns in a certain period of time.

The meaning of gross profit margin will help company analysts create better and more effective products than competitors. The higher this index shows that the business is profitable and controls costs more effectively than competitors.

Calculation formula: Gross profit margin = (Revenue – Cost of goods sold)/Revenue

Net profit margin

It is the amount of money remaining after subtracting the business's expenses such as: employee salaries, raw material costs, machinery depreciation, interest payments, taxes, etc. .

This index most closely represents the management efficiency of a business. You can easily see the profitability of the business after deducting all costs incurred over a long period of time.

The higher this index is and the stronger it grows over a long period of time, the more likely it is that the business activities of the enterprise are growing or going down.

Calculation formula: Net Profit Margin = Profit after tax / net revenue

Operating profit margin

A parameter that measures the profit a business earns from revenue after paying all production costs.

The Operating Profit Margin index shows a more comprehensive view of the business's revenue ratio after deducting all operating costs. If this index is higher, it means that the business is developing well and has great competitive potential compared to other industries.

Calculation formula: Operating Profit Margin = (Production profit / net revenue) x 100%

Hopefully, Saco Inc's sharing on how to calculate profit margin above will help whether or not your business is investing properly and developing well. If you have any concerns, please contact us immediately for specific advice.