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Profit Margin
A high level of profit looks very impressive but how can we tell if the level of profit the company is making is good or not? To do this we use another ratio. The ratio we use to assess this is called the PROFIT MARGIN. The profit margin is the level of profit, divided by the level of sales revenue as a percentage. In other words the percentage profit the firm is
making on its sales. If we look at this from year to year we get a much better picture of how well the firm is doing.
| PROFIT MARGIN = |
Operating profit
Sales revenue |
For example the level of profit may have gone up, but the profit margin hasn't. What does this mean? This may mean that although the firm has sold more and made more profit, their costs must have gone up by a greater percentage than their sales revenue and so the level of profit that is left is less as a percentage. Better control of their costs is clearly needed.
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