What is 'Pretax Profit Margin'
Pretax profit margin is a company's earnings before tax as a percentage of total sales or revenues. The higher the pretax profit margin, the more profitable the company. The trend of the pretax profit margin is as important as the figure itself, since it provides an indication of which way the company's profitability is headed.
BREAKING DOWN 'Pretax Profit Margin'
Profit is the main goal of forprofit organizations. The goal is to make a profit through growth and to grow every year. As a result, one of the most important roles of the financial and investment analyst is to track and forecast profitability. Financial analysts working inside a company must analyze profitability to learn what the company can do to improve sales. In addition to sales growth, the company can grow profits through cost savings. Indeed, it is the goal of every company to grow sales while reducing expenses. Companies that do this well experience an increase in pretax profit margin.Taxes are not a function of operations. As such, they are not included in operating expenses. Some analysts view taxes as a necessary cost that should not be considered when analyzing the performance of the company. That is, a company can manipulate the amount it pays in taxes, but it is not the goal of operations. Additionally, at times, tax expense can be larger than it has been in previous years due a tax penalty. Likewise, at times, tax expense may be much lower than it has been in previous years due a tax credit. In this case, analysts may be able to decrease earnings volatility by calculating pretax margin.
Pretax Margin Example
Pretax profit margin is calculated by deducting all expenses from sales except for taxes, and then dividing by sales. It can also be calculated by adding taxes back to net income or by dividing net income by '1 minus the effective taxrate,' and then dividing by sales.
For example, suppose that company A has gross profit of $100,000, operating expenses of $50,000 and interest expense of $10,000, with sales of $500,000. Earnings before taxes are calculated by subtracting operating expense and interest expense from gross profit. The calculation is $100,000 minus $50,000 minus $10,000, or $40,000. So pretax earnings are $40,000 and total sales are $500,000 for the given fiscal year. Pretax margin is calculated by dividing pretax earnings by sales, which is $40,000 divided by $500,000, or 8%. The pretax profit margin enables profitability to be compared across companies with significant differences in size and scale. Company B, which has $750,000 in sales and $50,000 in pretax earnings, may have higher profitability than company A in dollar terms, but has a lower pretax profit margin of 6%.

Pretax Earnings
A company's earnings after all operating expenses, including ... 
Profit Margin
Profit margin is part of a category of profitability ratios calculated ... 
Profit
A financial benefit that is realized when the amount of revenue ... 
Pretax Operating Income  PTOI
An accounting term that refers to the difference between a company's ... 
AfterTax Profit Margin
A financial performance ratio, calculated by dividing net income ... 
Operating Margin
A ratio used to measure a company's pricing strategy and operating ...

Investing
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. 
ETFs & Mutual Funds
Profitability Indicator Ratios: Effective Tax Rate
By Richard Loth (Contact  Biography)This ratio is a measurement of a company's tax rate, which is calculated by comparing its income tax expense to its pretax income. This amount will often ... 
Investing
A Look At Corporate Profit Margins
Take a deeper look at a company's profitability with the help of profit margin ratios. 
Investing
Profit Metrics: Gross, Operating & Net Profits
In addition to net profit, most analysts look at a companyâ€™s gross profit and operating profit to gauge performance. 
Investing
Whatâ€™s a Good Profit Margin for a New Business?
Surprisingly, the younger your company is, the better its numbers may look. 
Markets
Biggest Services Sector Movers for June 22, 2012
The market is currently up, with the Nasdaq up 0.5%, the S&P 500 rising 0.3% and the Dow climbing 0.5%. The Services sector (IYC) is up 0.2%, underperforming the market overall. The biggest ... 
Investing
Find Investment Quality In The Income Statement
Use these key attributes to uncover toplevel investments. 
Investing
What is Profit?
Profit is a general term used to denote when earnings exceed the expenses incurred to generate those earnings. 
Entrepreneurship & Small Business
Is Net Income The Same As Profit?
Net income and profit both deal with positive cash flow, but there are important differences between the two concepts. 
Investing
What's a Good Profit Margin for a Mature Business?
How to determine if the amount you clear dovetails with the competition.

What is the difference between gross profit margin and net profit margin?
Understand the difference between the two profitability measures, gross profit margin and net profit margin, and how to calculate ... Read Answer >> 
What costs are not counted in gross profit margin?
Explore the various measures of a company's profitability, such as gross, operating and net profit margins, and understand ... Read Answer >> 
What does operating profit margin tell a business owner?
Learn about the operating profit margin, how it is calculated and what it says to both business owners and investors about ... Read Answer >> 
Should I look at a company's operating profit or net profit?
Explore the ways in which investors and market analysts use a company's operating profit and net profit margins for equity ... Read Answer >> 
What is the difference between gross profit margin and operating profit margin?
Understand the difference between gross profit margin and operating profit margin, two measures of corporate profitability ... Read Answer >> 
What is the formula for calculating profit margins?
Learn about gross, operating and net profit margins, how each is calculated and how they are used by businesses and investors ... Read Answer >>