Q:

How do you calculate margin?

A:

Quick Answer

Divide the profit by the selling price to find the gross margin percentage for any items, according to Calculator Soup. The profit is the revenue an item brings in less the cost.

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How do you calculate margin?
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Full Answer

Consider the example of a cheeseburger that costs $0.75 to make but costs $1.50 to buy. The profit for each cheeseburger is ($1.50 - $0.75) or $0.75. The profit margin is 50 percent, as the profit ($0.75) divided by the selling price ($1.50) is 0.5, or 50 percent, as stated by Calculator Soup.

Taken from financial statements, profit margin calculations are similar. Divide net income by revenues or net profits by sales to determine the overall profit margin. This metric shows how much money a company retains of its earnings. When making a comparison of multiple companies in the same or similar industries, higher profit margins demonstrate more consistent cost control in comparison to the competition, as stated by Investopedia.

If a company brings in $5 million in net income on sales of $50 million, the profit margin is 10 percent. The next year, if they report that net income went up to $8 million, but sales went up to $160 million, the profit margin plummeted to 5 percent. Even though net income is higher, the profit margins are shrinking, indicating possible problems with cost control, which would be a red flag for potential investors, notes Investopedia.

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