MASTERCLASS Investment –Company Health Ratios – Profit Margins

MASTERCLASS Investment – Company Health Ratios – Profit Margins

Investment – Company Health Ratios – Profit Margins

In the Profit & Loss Statement or Income Statement, (one of the 3 Financial Reports Companies issue) there are four levels of profit or profit margins

Gross profit (after cost of sales deducted from sales/revenue),

Operating profit (after expenses deducted),

Pretax profit (before tax and other non-regular items) and

Net profit (Final).

Note that “profit”, “earnings” and “income” are all used interchangeably, and mean the same thing.

When the term “margin” is stated, it can apply to the absolute/actual number for a given profit level and/or the number as a percentage of net sales/revenues, taken as 100%.

The absolute amount, the dollar amount, is on the Profit & Loss. The profit margin uses the percentage calculation to provide a better comparison of a company’s profitability compared to prior periods (months and year to date) and in comparison to peer companies and industry benchmarks. The margin is the amount of profit (at the gross, operating, pretax or net level) as a percent of the total sales generated.

So the formulas are –

Gross Profit margin is Gross Profit / Sales (GP divided by sales).

Operating Margin is Operating Profit / Sales (OP divided by sales),

and so on.

Monitoring the profit ratios / margins over months and years can detect consistency or positive/negative trends in a company’s earnings. Positive profit margin analysis translates into positive investment quality. To a large degree, it is the quality, and growth, of a company’s earnings that ideally should see a rising Earnings per Share and Return on Equity these ultimately drive a stock price up.

Want to learn the core issues of share investing?

See our slides SMSF & Shares Overview to get a quick session where you can learn to easily understand Company Financial Statements, how to find healthy companies, what Tools and Ratios to use, work on examples, and also includes how to get better investment outcomes.

If you have questions, call 0407 361 596

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