How do I calculate the profit margin?

There are several types of profit, and therefore there are several ways to calculate the profit range. Profit is generally considered to be the income of the company, lower all costs and expenses associated with earnings, but in determining the efficiency of the company, other understanding of profit is meaningful. Two of the more commonly known forms of profit are gross profit and net profit. Hrube profit is the income from the sale of lower costs of the goods sold (COGS); Net profit is a gross profit of smaller overhead items such as rent and taxes.

Hrube is often a more reliable indicator of the company's profitability, because it includes mainly the cost items over which the company has great control, especially costs, including work, transfer of raw materials to the condition in which they are sold. Net profit is a less reliable indicator of the actual profitability of the company, as it reflects many factors generally outside the content enterpriseol, such as rent and the costs associated with distribution. The result is a gross profit. The gross profit range is the ratio of gross profit divided by totaljmy. For example, if the company has an annual total revenue of $ 1,000,000 (USD), with COGS $ 750,000, gross profit is $ 250,000 and gross profit is 25 percent ($ 250,000 / $ 1,000,000).

To calculate the profit margin on the basis of net profit or net profit range, all other costs associated with the company must be charged. By using the above example, if rent, taxes, public services and all other spending a total of $ 110,000, then a net profit per year is $ 140,000. Calculating a profit margin based on a net profile, distribute net profit with total sale ($ 140,000 / $ 1,000,000), which is 14 percent.

There are other rates of profitability, each of which requires the calculation of the profit range in a slightly different way. For example, income before interest, taxes, depreciation and amortization (EBITDA) is a special method of calculating the profit range except for all costs that did not arisea real operation of the company. EBITDA has become a popular measure of profitability in the last two decades of the 20th century, because it was basically a way to calculate the profit range on a cash basis without including any accounting acrual or other costs beyond immediate inspection.

This different rates of profitability are important to investors because they are considered better hints of business viability than net profit margins, including costs not directly related to the company's activities. For example, if two competing compans have the same net profit margin, but one pays taxes at a higher rate than the other, tax payments lead to distortion of the actual profitability of companies. Removing tax payments from the calculation of the profit margin will publish that a company that pays a higher tax rate was indeed profitable.