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

Related Articles
  1. Investing

    A Look At Corporate Profit Margins

    Take a deeper look at a company's profitability with the help of profit margin ratios.
  2. Investing

    Profitability Indicator Ratios

    Learn about profit margin analysis, effective tax rate, return on assets, return on equity and return on capital employed.
  3. Investing

    The Difference Between Gross and Net Profit Margin

    To calculate gross profit margin, subtract the cost of goods sold from a company’s revenue; then divide by revenue.
  4. Managing Wealth

    What’s a Good Profit Margin for a New Business?

    Surprisingly, the younger your company is, the better its numbers may look.
  5. Investing

    Calculating Operating Ratio

    An operating ratio compares a company’s operating expenses to its net sales.
  6. Investing

    Contribution Margin

    Contribution margin is a cost accounting concept that allows a company to determine the profitability of individual products.
  7. Investing

    Analyze Investments Quickly With Ratios

    Make informed decisions about your investments with these easy equations.
  8. Investing

    Key Financial Ratios for Retail Companies

    Using the following liquidity, profitability and debt ratios, an investor can gather deeper knowledge of a retail company's short-term and long-term outlook.
  9. Investing

    What Is the Best Measure of a Company's Financial Health?

    Discover the single best financial metric that investors can use for determining the financial health and long-term sustainability of a company.
Frequently Asked Questions
  1. What's the Best Way to Contact Warren Buffett?

    Learn how to contact Warren Buffett and what kinds of contact is most likely to receive a response from him or from his company, ...
  2. What is the Financial Services Sector?

    A diverse group of companies, beyond banks and credit unions, comprises the financial services sector.
  3. Who are Whole Foods' (WFM) main competitors?

    Whole Foods' main competitors are Sprouts Farmers Markets and Trader Joe's. However, the recent acquisition by Amazon my ...
  4. What caused the Stock Market Crash of 1929 that preceded the Great Depression?

    Find out what led to the stock market crash of 1929, which in turn led to the Great Depression. It sparked a nearly 90% loss ...
Trading Center