3

When looking at a company's income statement to calculate the Profit Ratio (Gross Margin)

PM = Net Profit / Sales

Do you include "other" revenue in the equation?

Example: XYZ Ltd Income Statement for 2012

Revenues from Sales of Goods = $100

Other operating revenue = $50

Net Profit = $ 30

Should the Profit Margin ratio equation be:

PM = Net Profit / Revenues from Sales of Goods
PM = 30 / 100
PM = 30%

or

PM = Net profit / Revenue from Sales of Goods + Other operating revenue 
PM = 30 / (100 + 50)
PM = 20%

migrated from quant.stackexchange.com Apr 25 '13 at 16:21

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3

According to Understanding The Income Statement, it should be the former. Observe the link's sample income statement:

Sample Income Statement

The profit margin is Net Sales over Net Income. Net Income, meanwhile, is the sum of

  • Net Sales (+)
  • Cost of Sales (-)
  • Operating Expenses (SG&A) (-)
  • Other Income (Expense) (+/-)
  • Extraordinary Gain (Loss) (+/-)
  • Interest Expense (-)
  • Taxes (-)

So you would not want to account for one of the above factors in addition to Net Sales.

1

You need to clarify through a description what you want, many different margin names are often used interchangeably(EBIT = Operating Income etc.) Gross Margin the way I think you're asking would use Gross Profit, which is Revenue - Cost of Goods Sold. And You would arrive at Gross Margin through Gross Profit / Revenue.

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