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CFA Level 1 - Operating Profitability Ratios OPERATING PROFITABILITY RATIOS
Operating Profitability can be divided into measurements of return on sales and return on investment.
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
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 tax, depreciation and amortization
net sales |
4. Per-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 |
Next: CFA Level 1 - Return on Investment Ratios
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