Fatimah Azzahra Arham

06111640000111
PROFIT MARGIN

The profit margin is a ratio of a company's profit divided by its revenue. It's always
expressed as a percentage. It tells you how well a company uses its income. A high ratio means
the company generates a lot of profit for every dollar of revenue. A low percentage means the
firm's high costs reduce the profit for each dollar of income. The profit ratio compares
the earnings reported by a business to its sales. It is a key indicator of the financial health of
an organization.

We can use the profit margin to compare the success of large companies versus small ones.
We might think a large company is doing well because it has billions in revenue and billions in
profit. But if its profit margin is low, it might not be doing as well as a much smaller company that
has a better ratio.The profit margin also allows you to compare your company against your
competitors. We can see how you rank compared to your industry standard. We can also use it to
see how you improve over time.

𝑁𝑒𝑡 𝑃𝑟𝑜𝑓𝑖𝑡
𝑃𝑟𝑜𝑓𝑖𝑡 𝑅𝑎𝑡𝑖𝑜 =
𝑅𝑒𝑣𝑒𝑛𝑢𝑒

For example, ABC International has net after-tax profits of $50,000 on net sales of
$1,000,000, which is a profit ratio of: $50,000 Profit ÷ $1,000,000 Sales = 5% Profit ratio.
The profit margin ratio is customarily used in each month of a month-to-month comparison,
as well as for annual and year-to-date income statement results.

There are three types of profit margins with their own calculations. They differ by what
they include in costs. Each type tells managers different things about the business.

Gross profit is the simplest profitability metric because it defines profit as all income that
remains after accounting for the cost of goods sold (COGS). COGS includes only those expenses
directly associated with the production or manufacture of items for sale, including raw materials
and wages for labor required to make or assemble goods. Excluded from this figure are, among
other things, any expenses for debt, taxes, operating or overhead costs, and one-time expenditures
such as equipment purchases. The gross profit margin compares gross profit to total revenue,
reflecting the percentage of each revenue dollar that is retained as profit after paying for the cost
of production.
𝑁𝑒𝑡 𝑆𝑎𝑙𝑒𝑠 − 𝐶𝑂𝐺𝑆
Gross profit margin =
𝑁𝑒𝑡 𝑆𝑎𝑙𝑒𝑠
Operating Profit Margin is a slightly more complex metric, operating profit also takes into
account all overhead, operating, administrative and sales expenses necessary to run the business
on a day-to-day basis. While this figure still excludes debts, taxes and other non-operational
expenses, it does include the amortization and depreciation of assets. By dividing operating profit
by revenue, this mid-level profitability margin reflects the percentage of each dollar that remains
after payment for all expenses necessary to keep the business running.
 𝑂𝑝𝑒𝑟𝑎𝑡𝑖𝑛𝑔 𝐼𝑛𝑐𝑜𝑚𝑒
𝑂𝑝𝑒𝑟𝑎𝑡𝑖𝑛𝑔 𝐼𝑛𝑐𝑜𝑚𝑒 𝑀𝑎𝑟𝑔𝑖𝑛 = 𝑥 100%
𝑅𝑒𝑣𝑒𝑛𝑢𝑒

Net Profit Margin isThe infamous bottom line, net income, reflects the total amount of
revenue left over after all expenses and additional income streams are accounted for. This includes
COGS and operational expenses as referenced above, but it also includes payments on debts, taxes,
one-time expenses or payments, and any income from investments or secondary operations.
The net profit margin reflects a company's overall ability to turn income into profit.

𝑁𝑒𝑡 𝑃𝑟𝑜𝑓𝑖𝑡 𝑀𝑎𝑟𝑔𝑖𝑛

𝑅𝑒𝑣𝑒𝑛𝑢𝑒 − 𝐶𝑜𝑠𝑡 𝑜𝑓 𝐺𝑜𝑜𝑑 𝑆𝑜𝑙𝑑 − 𝑂𝑝𝑒𝑟𝑎𝑡𝑖𝑛𝑔 𝑒𝑥𝑝𝑒𝑛𝑠𝑒𝑠 − 𝐼𝑛𝑡𝑒𝑟𝑒𝑠𝑡 − 𝑇𝑎𝑥𝑒𝑠
=( )
𝑅𝑒𝑣𝑒𝑛𝑢𝑒
𝑁𝑒𝑡 𝐼𝑛𝑐𝑜𝑚𝑒
𝑁𝑒𝑡 𝑃𝑟𝑜𝑓𝑖𝑡 𝑀𝑎𝑟𝑔𝑖𝑛 =
𝑅𝑒𝑣𝑒𝑛𝑢𝑒

The profit margin can effects the economy. The profit margin is critical to a free market
economy driven by capitalism. The margin must be high enough to reward the owners of the
company for their risk. Otherwise, they will close the company and invest in something else. That's
how profit margins determine the supply for a market economy. If a product doesn't create a profit,
companies won't supply it no matter how high the demand.

Profit margins are a large reason why companies outsource jobs. They cannot hire
expensive U.S. workers, sell their products at a competitive cost, and maintain reasonable
margins. To keep prices low, they must move jobs to lower-cost workers in Mexico, China, and
other foreign countries. People complain that companies are greedy, but that's the role of profit
margins. No one will stay in business in a market economy without them.

The margin may also set the price. That's because some companies determine that they
must receive a certain margin. They just make the price that much higher than the cost. For
example, retail stores must have a 50 percent gross margin to cover costs of distribution plus
return on investment. That margin is called keystone. They double the price over wholesale.
Companies that are regulated, like utilities, also use this method. The regulatory agency sets their
profit margin. They also price the good or service at cost plus margin.

Source :
https://www.thebalance.com/profit-margin-types-calculation-3305879

https://www.jurnal.id/id/blog/komponen-laporan-laba-rugi-laba-kotor-vs-laba-bersih/

https://www.investopedia.com/terms/p/profitmargin.asp

https://corporatefinanceinstitute.com/resources/knowledge/finance/net-profit-margin-formula/