margin

Examples of margin in the following topics:

• Profit Margin

  • Profit margin is one of the most used profitability ratios.
  • The higher the profit margin, the more profit a company earns on each sale.
  • The gross profit margin calculation uses gross profit and the net profit margin calculation uses net profit .
  • The profit margin is mostly used for internal comparison.
  • A low profit margin indicates a low margin of safety.

• Operating Margin

  • The operating margin (also called the operating profit margin or return on sales) is a ratio that shines a light on how much money a company is actually making in profit.
  • For example, an operating margin of 0.5 means that for every dollar the company takes in revenue, it earns $0.50 in profit.
  • However, the operating margin is not a perfect measurement.
  • Furthermore, the operating margin is simply revenue.
  • The operating margin is found by dividing net operating income by total revenue.

• The Marginal Cost of Capital

  • The marginal cost of capital is the cost needed to raise the last dollar of capital, and usually this amount increases with total capital.
  • The marginal cost of capital is calculated as being the cost of the last dollar of capital raised.
  • Generally we see that as more capital is raised, the marginal cost of capital rises .
  • The marginal cost of capital can also be discussed as the minimum acceptable rate of return or hurdle rate.
  • The Marginal Cost of Capital is the cost of the last dollar of capital raised.

• The DuPont Equation

  • Profit Margin = 400,000/1,000,000 = 40%.
  • Profit margin is a measure of profitability.
  • Profit margin is calculated by finding the net profit as a percentage of the total revenue.
  • Companies with low profit margins tend to have high asset turnover, while those with high profit margins tend to have low asset turnover.
  • High margin industries, on the other hand, such as fashion, may derive a substantial portion of their competitive advantage from selling at a higher margin.

• Leverage Models

  • To calculate Degree of Operating Leverage, we divide the contribution margin by the difference between contribution margin and fixed costs:
  • For a given level of sales and profit, a company with higher fixed costs has a higher contribution margin, and hence its operating income increases more rapidly with sales than a company with lower fixed costs (and correspondingly lower contribution margin).
  • The Degree of Operating Leverage is closely related to the rate of increase in the operating margin, which is the ratio of operating income to net revenue.
  • As sales increase past the break-even point, both operating margin and the DOL increase rapidly from 0%.
  • As sales continue to increase past break-even, the rate of change in operating margin decreases, as does the the rate of change of the DOL.

• Tax Rate

  • An individual's tax bracket is the range of income for which a given marginal tax rate applies.
  • The marginal tax rate may increase or decrease as income or consumption increases, although in most countries the tax rate is progressive in principle.
  • In such cases, the average tax rate will be lower than the marginal tax rate.
  • For instance, an individual may have a marginal tax rate of 45%, but pay an average tax of half this amount.
  • Marginal tax rates may be published explicitly, together with the corresponding tax brackets, but they can also be derived from published tax tables showing the tax for each income.

• Return on Total Assets

  • The ROA is the product of two other common ratios - profit margin and asset turnover.
  • When profit margin and asset turnover are multiplied together, the denominator of profit margin and the numerator of asset turnover cancel each other out, returning us to the original ratio of net income to total assets.
  • Profit margin is net income divided by sales, measuring the percent of each dollar in sales that is profit for the company.
  • That can then be broken down into the product of profit margins and asset turnover.

• Tax Deductions

  • A company's marginal tax rate is 35%.
  • The marginal tax rate is dependent upon a jurisdiction's tax structure, usually referred to as tax brackets.
  • To determine the after-tax cost of a deductible expense, we simply multiply the cost by one minus the appropriate marginal tax rate .
  • For example, a tax credit of $1,000 reduced taxes owed by $1,000, regardless of the marginal tax rate.
  • This graph plots the marginal income tax rates for the top tax bracket in the US from 1913 to 2009.

• Break-Even Analysis

  • To find the amount of units required to be sold in order to break even, we simply divide the total fixed costs by the unit contribution margin.
  • Unit contribution margin can be thought of as the fraction of sales, or amount of each unit sold, that contributes to the offset of fixed costs.
  • When sales have exceeded the break-even point, a larger contribution margin will mean greater increases in profits for a company.
  • Contribution margin (C) is the unit net revenue (P = price) minus unit variable cost (V = variable cost).

• Trade-Off Consideration

  • The marginal benefit of further increases in debt declines as debt increases, while the marginal cost increases.
  • As more capital is raised and marginal costs increase, the firm must find a fine balance in whether it uses debt or equity after internal financing when raising new capital.