The profit margin is an indication of how profitable the company is in the activities it carries out, in percentage values.
This margin is used to determine the value that a product should be sold, which is considering all the costs that the company has, whether these are variables, fixed, taxes or depreciation, as examples:
- Operating costs;
- Depreciation and amortization costs;
- Expenditure on raw materials or goods;
- Tax expenses (such as PIS, COFINS, ISS, Income tax, among others).
The price that a company sells its products is above the costs and expenses that it had to produce. If you are below expenses, you have a loss. In a simple way, the profit, also known as the result of the year, is calculated from:
Net Income = Net Sales (Income) – (Total Costs and Expenses)
If this result is equal to zero, that is, sales and costs with the same values, the business has no profit or loss and is at its accounting breakeven point.
You can learn more about what break-even points are and what profit is about.
Calculation of profit margin
The easiest way to calculate profit margin is to use the formula:
Net Margin = Net Income – (Costs + Expenses) / Net Income x 100%
From the top of the formula, you can see that the result will be the total net profit of the company.
Therefore, the result is the percentage of the profit margin of the company, which we can observe taking as an example a net profit of R $ 650,000.00 with income of R $ 1,500,000.00 from a business. Stay with:
ML = 650,000 / 1,500,000 x 100% = 43.33% profit margin.
The interpretation of this result is that “for every R $ 1.00 sold, the company has around R $ 0.43 in profits”.
The same can be done for a separate product. Just consider the profit and income you had on a product.
Gross profit margin
The profit margin subtracts all costs and expenses, making it known as the “net profit margin.” On the other hand, it is also possible to obtain the gross margin using the formula:
Gross margin = Net income – Operating costs / Net income x 100%
This time we only consider the operating costs for the calculation, that is, the cost of production and the profit of that production. For companies that only buy goods to resell them later, this calculation shows the profit the company has on the products sold.
In the case of a retailer who buys goods in a given month for R $ 150,000.00 and resells them for R $ 230,000.00, he obtains a gross margin of:
MB = (230,000 – 150,000) / 230,000 x 100% = 34.78%
This result indicates the gross profit of this company, which is interpreted as “for every R $ 1.00 sold, the company generates gross profit of R $ 0.34”.
When considering all the other costs of this same company for the calculation, we return to the concept of net margin, that if it is well below 34.78%, the company will be far from an ideal profit margin.