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It is very common for the terms profit (also known as profit or profit) and profit margin to be used synonymously, but they are not. The profit or result is measured in terms of monetary figures, while the profit margin is expressed as a percentage of sales; Both measures are complemented for the purpose of an accurate analysis.
This means that they are two correlated measures or metrics that use the same inputs for calculation purposes and allow the same analysis or conjecture, but are expressed differently.
Both for profit and margin we can have different levels of appreciation such as profit and gross margin; the profit and operating margin or exploitation; and finally, the profit and the net margin.
A company can generate a profit margin that we can consider high; However, when we assess the figures in detail, we can see that what we see as a high margin is really a derisory profit in monetary terms.
The opposite case also applies, that is, we can conclude that a margin is extremely low; however, if the company is sales-oriented as is the case with supermarkets, that tiny percentage can represent millions of dollars in profit.
With the above, it is clear to us that both metrics must be evaluated to measure the performance of the company at the results level.
Next we consolidate the concepts and the differences between profit and profit margin.
What is the utility?
The utility is also known as profit, gain, and result in some cases when it comes to the bottom line or the end result is called net income.
It is simply the amount of dollars (or in monetary units) calculated when all expenses for a particular period are subtracted from the income achieved in that period of time.
If this number is positive, the company generates profits; otherwise, the company is operating at a loss. A profit is adequate when it satisfies the expectations of shareholders, after having honored debt commitments and tax burdens.
When it comes to net income, that money is put into the company’s retained earnings or given to the owners of the company as a return on their investment via dividend distribution.
What is the profit margin?
The profit margin is a ratio that acts as a meter in percentage terms of the operational and financial management of the company, depending on the level at which it is estimated (gross, operational or net).
It is measured as a percentage: how much of each dollar of sales (or the currency of your country) is transformed into profit by the management of the company; while higher, it is concluded that management improves.
A financial analyst may conclude that the net margin is adequate when it equals or exceeds the weighted average cost of the sources of capital invested in the company.
Knowing the amount or amount of profits, the calculation of the margin is very simple and obeys the quotient between profit over sales.
So to know the profit rate or margin, the owners have to divide the number of the profit by the number that totaled the sales. For example, if a company achieved $ 100,000 in revenue and a net profit of $ 40,000, then the net profit margin or rate for that period would be 40% (40,000 / 100,000 = 0.40 or 40%).
The Small Business site comments that a good part of the companies, in their desire to improve profit margins, appeals in the first instance to increase sales when possibly a few cost reduction measures can be more efficient, even more so in a market strongly competed.
Difference between margin and profit
While these two metrics contain the word “utility“, they are complementary but not interchangeable.
The utility gives a cold number as to how much money was produced by a company; however, it does not tell the full story. Without looking at the profit margin number, there is no way to count how the company did, by controlling expenses and how much of the amount of sales flows through the bottom line.
As we indicated at the beginning, just because a company has a huge profit does not necessarily mean that it is successful because it can have extremely low profit margins.
If you increase your profits while keeping your costs constant or decrease costs while keeping your profits constant, both will increase: the profit and the profit margin.
However, it is possible to increase one of these two figures without increasing the other. For example, you can increase your profits but increase your costs as well. When this happens, your profit may be greater in monetary terms, but depending on the associated costs, there may be no change in the value of the profit margin.
Margin and profit, when to use each?
Review the utility when you are trying to approximate a payment capacity of the company before new investments or projects, either through self-financing, a new capital issue or loans.
If your company’s profits increase from year one to year two to year three, by a greater proportion than the rate of inflation, for example, you will know that you are experiencing a degree of success over time.
If an analyst wants to compare businesses that are similar, profit margin is often a better metric because it will show him how companies control their costs, regardless of the size of their operations.