How to Calculate Margins

In financial terms, by doing a total of sales, the margin is referred to as the amount of benefit received. Financial analysts mainly observe three levels of margins: Gross Profit Margin (GM), Operating Profit Margin (OM), and Net Income Margin (NI). All can be easily calculated using the results account found in the 10 (k) form.

Defines the gross margin (GM). This is defined as the total income of a company minus its cost of sales, divided by the total revenue. Expressed as a percentage, gross margin represents the percentage of total revenues that the company retains after paying for the cost of goods sold (CGS). This is usually the element of the second line in the statement of accounts.

Go through An Example gross margin (GM). If a company that makes furniture obtains $ 1,000 in sales and a cost of the same (inventory) is US $ 600, the gross profit is equal to sales (1,000) less cost of sales (600), or US$ 400. To calculate the gross margin, take gross profit (400) and divide it by total sales (1,000). The equation is 400/1,000, or 0.40. Multiply it by 100 to convert it into a percentage. The equation is 0.40 x 100 = 40 percent. If the company’s gross margin for the most recent quarter is 40%, this means that it holds US$ 0.40 for every dollar of revenue generated by sales.

Defines the Operating Margin (OM). This is a measure of the proportion of a company’s income that remains before interest and taxes and after operating expenses, such as wages, benefits and travel. If a company’s operating margin is growing, it means that it is earning more for every dollar of sales.

Calculate the operating margin. Using the same example, assume that the general expenses, income, salaries and benefits (operating expenses) are US$ 200. The operating profit is equal to the gross profit (400) minus the operating expenses (200). The equation is 400 minus 200 = 200. To calculate the operating margin, take the operating profit (200) and divide it by the total sales (1,000). The equation is 200/1,000 or 0.20. Multiply it by 100 to convert it into a percentage. The equation is 0.20 x 100 = 20%. If a company’s operating margin for the most recent quarter is 20%, it means that it holds $ 0.20 for every dollar of revenue generated by sales.

Defines the Net Revenue Margin (NI). The net profit margin is calculated by dividing net income by total sales. Net income is the operating margin minus interest minus taxes. This number can be found in the statement of accounts.

Calculate the net profit margin. Using the same example, assume that the interest expenses are US$ 50 and the taxes are another US $ 50. The net income is equal to the operating profit (200) minus the taxes (50) minus the interest (50) = 100. The equation is 200 minus 50 minus 50 = 100. To calculate the net profit margin, take the profit benefit net (100) and divide it by total sales (1,000). The equation is 100/1,000, or 0.10. Multiply it by 100 to convert it into a percentage. The equation is 0.10 x 100 = 10 percent. If a company’s operating margin for the most recent quarter is 10%, it means that it holds $ 0.10 for every dollar of revenue generated by sales.

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