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 profitÂ Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â net sales
Where: 
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 Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â net sales
Where: 
3. EBITDA Margin
This ratio indicates the profitability of current operations. This ratio does not take into account the company's capital, noncash expenses or tax structure.
Formula 7.17
EBITDA margin = earnings before interest, tax, depreciation and amortization Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â net sales 
4. PreTax 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
Pretax margin = Earning before tax Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â sales 
5. Net Margin (Profit Margin)
This ratio indicates the profitability of a company's operations.
Formula 7.19
Net margin = net income Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â sales 
6. Contribution Margin
This ratio indicates how much each sale contributes to fixed expenditures.
Formula 7.20
Contribution margin = contribution Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â sales
Where: 

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Term
The Difference Between Gross and Net Profit Margin
To calculate gross profit margin, subtract the cost of goods sold from a companyâ€™s revenue; then divide by revenue. 
Term
Gross, Operating and Net Profit Margins
A companyâ€™s income statement includes the companyâ€™s gross, operating and net profits. 
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Surprisingly, the younger your company is, the better its numbers may look. 
Economics
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The ratio of net profits to revenues for a company that shows how much of each dollar earned by the company is translated into profits. 
Economics
Calculating Operating Ratio
An operating ratio compares a companyâ€™s operating expenses to its net sales. 
Investing Basics
Contribution Margin
Contribution margin is a cost accounting concept that allows a company to determine the profitability of individual products.

Profit Margin
Profit margin is part of a category of profitability ratios calculated ... 
Operating Margin
A ratio used to measure a company's pricing strategy and operating ... 
AfterTax Profit Margin
A financial performance ratio, calculated by dividing net income ... 
Net Profit Margin
Net Margin is the ratio of net profits to revenues for a company ... 
Marginal Profit
Marginal profit is the profit earned by a firm or individual ... 
Pretax Profit Margin
A company's earnings before tax as a percentage of total sales ...

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