Understanding profit margin and accounting metrics puts you in a better position to achieve greater returns on your investments. There are many criteria, not all of them are important for all businesses, there are some indicators that have more weight than others. Understanding how profit margin is calculated gives you another tool in your toolbox of investment that will help you choose good investments.
You may have a look at this short video to know more.
Profit margin is simply earnings of a company divided by revenue. In other words, it is what percentage of sales dollar flows through to investors. All revenues, income and expenses are taken into account, but dividends are not included. If the net income of the company was US $ 2 million and total company revenue was $ 10 million, to find the profit margin must divide $ 2 million $ 10 million, and then multiply the result by 100 to obtain the percentage. In this case, the profit margin would be 20 percent.
A company had total revenues of $ 5 million last year and had total expenditures of $ 3 million. This means that the net income of the company was $ 2 million, or US $ 5 million in revenues minus $ 3 million in expenses. To find the profit margin, divide $ 2 million and $ 5 million is multiplied by 100 to get a response of 40 percent.
In a second example, a company had revenues of $ 20 million last year and total expenses of $ 5 million. To find the markup, you must include all income and expenses. In this case, take the $ 20 million in income and subtract $ 5 million in expenses for a net income of $ 15 million. Then divide $ 15 million $ 20 million and multiplied by 100 to obtain a profit margin of 75 percent.
Many analysts consider profit margins trends and components to get an idea of where future earnings can be expected to follow. Simplify the forecasting process because, if an analyst is confident that the profit margin will remain stable, all the analyst has to do is to project revenue trends and demands to know where the profits go.
You may need to examine more than good margin trends to get an idea of where the proceeds go. There are many moving parts in an income statement, and just try to simplify a figure is asking for trouble. We must analyze the other elements and indicators of results that give you a better idea as to future revenues.