Profit margin
6.1 Calculation and Understanding of Accounting Ratios
Profit Margin
Profit margin is a quick way to see how much of every pound (or dollar) a company keeps as profit after covering all its costs. Think of it as the slice of pizza you get after paying for the dough, sauce and toppings – the bigger the slice, the better the profit!
Formula (in LaTeX):
$ \displaystyle \text{Profit Margin} = \frac{\text{Net Profit}}{\text{Revenue}} \times 100\% $
Step‑by‑Step Calculation
- Find Revenue: Total money earned from sales. Example: £10,000.
- Find Net Profit: Revenue minus all costs (cost of goods sold, operating expenses, taxes, etc.). Example: £2,500.
- Apply the Formula: $ \displaystyle \frac{2,500}{10,000} \times 100\% = 25\% $.
- Interpret: The company keeps 25p as profit for every £1 earned.
Example in a Table
| Item | Amount (£) |
|---|---|
| Revenue | 10,000 |
| Net Profit | 2,500 |
| Profit Margin | 25% |
Why It Matters
- Shows how efficiently a company turns sales into profit.
- Helps compare companies in the same industry.
- Useful for investors, creditors, and managers to gauge financial health.
Exam Tip: 📌 When you see a question about profit margin, first check if the problem gives you net profit or gross profit. The formula uses net profit. Also, always express the answer as a percentage and round to the nearest whole number unless the question specifies otherwise. Remember the formula:
$ \displaystyle \text{Profit Margin} = \frac{\text{Net Profit}}{\text{Revenue}} \times 100\% $
$ \displaystyle \text{Profit Margin} = \frac{\text{Net Profit}}{\text{Revenue}} \times 100\% $
Quick Check: If a company’s revenue is £50,000 and its net profit is £5,000, what is the profit margin?
Answer: $ \displaystyle \frac{5,000}{50,000} \times 100\% = 10\% $ 💰
Answer: $ \displaystyle \frac{5,000}{50,000} \times 100\% = 10\% $ 💰
Revision
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