How to Calculate Profit Using Profit Margins
Profit margins are ratios of profits to sales, expressed as percentages. The income statement of a company shows the sales, costs and profits for a period. Profit margin calculations show how a company is faring compared to its own historical performance and to other companies in the industry. To calculate profits using profit margins, work backward from the margin to the dollar amount.
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Instructions
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Get the sales for the period. If you do not have it, get at least one profit or expense amount in dollars. You will need one of these numbers to derive the various profits. If you do not have any of these numbers for the current period, estimate current-period sales based on the prior-period sales and the historical growth rate.
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Multiply the gross profit margin by sales to get the gross profit. For example, if the gross profit margin is 60 percent and sales are $1 million, the gross profit is equal to 60 percent multiplied by $1 million, or $600,000. In the same way, find earnings before interest, depreciation and amortization; operating income; profit before taxes; and net profit by calculating the product of the respective margin percentages and sales. For example, operating income is equal to the product of sales and operating margin, and net profit is equal to the product of sales and net profit margin.
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Derive profits if you know the profit margins and at least one of the profits in dollars. In the scenario where you do not know sales but you do know the net income margin and the net income in dollars, sales would be equal to the net income divided by the net income margin. For example, a net income margin of 10 percent and net income of $200,000 mean sales of $200,000 divided by 10 percent (0.1), or $2 million. Then, find the other profits by multiplying the sales and corresponding margin percentages.
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Compute profits when you know the profit margins and at least one of the expense categories in dollars. In the scenario where you do not know sales or any of the profit amounts in dollars but you do know the cost of goods sold, then sales equal cost of goods sold divided by (1 minus the gross profit margin). For example, if the cost of goods sold is $600,000 and the gross profit margin is 40 percent, sales equal $600,000 divided by (1 minus 0.4), or $1 million.
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