Financial Ratios - Operating Profitability Ratios

Operating Profitability can be divided into measurements of return on sales and return on investment.

I. Return on Sales

1. Gross Profit Margin
This shows the average amount of profit considering only sales and the cost of the items sold. This tells how much profit the product or service is making without overhead considerations. As such, it indicates the efficiency of operations as well as how products are priced. Wide variations occur from industry to industry.

Formula 7.15

Gross profit margin = gross profit 
                               net sales

Where:
Gross profit = net sales - cost of goods sold

2. Operating Profit Margin
This ratio indicates the profitability of current operations. This ratio does not take into account the company's capital and tax structure.

Formula 7.16

Operating profit margin = operating income
                                      net sales

Where:
Operating income = earnings before tax and interest from continuing operations

3. EBITDA Margin
This ratio indicates the profitability of current operations. This ratio does not take into account the company's capital, non-cash expenses or tax structure.

Formula 7.17

EBITDA margin = earnings before interest, tax, depreciation and amortization
                                                  net sales

4. Pre-Tax Margin (EBT margin)
This ratio indicates the profitability of Company's operations. This ratio does not take into account the company's tax structure.

Formula 7.18

Pre-tax margin = Earning before tax
                               sales

5. Net Margin (Profit Margin)
This ratio indicates the profitability of a company's operations.

Formula 7.19

Net margin = net income
                     sales

6. Contribution Margin
This ratio indicates how much each sale contributes to fixed expenditures.

Formula 7.20

Contribution margin = contribution
                                   sales

Where:
Contributions = sales - variable cost

Return on Investment Ratios


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