How to Determine a Profit Margin As a Percentage of Gross Income
Profit margin is a useful metric to investors and financial analysts. The profit margin illustrates how much profit a company is able to generate from each sale. Factors influencing profit margin are competition with other businesses in the same industry, cost to manufacture or procure the items a company sells and the cost of doing business in general. By nature, some companies achieve high margins, and others produce low margins. Thus, calculating profit margin percentage is a valuable tool for making comparisons between competitors in the same industry.
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Instructions
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Obtain the income statement of the business concern for which you're calculating the profit margin. You can find income statements on company websites, from daily business newspapers, including the Wall Street Journal and Investor's Business Daily, and from web sources, such as Money Central at MSN.com.
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Obtain the income statements of industry competitors, if the goal is to make a comparison of profit margins between companies.
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Locate the figure for "Gross Profit" on the income statement.
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Locate the figure for "Total Revenue" on the income statement.
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Enter the gross profit figure in a calculator and divide by the total revenue figure. This computation--gross profit divided by total revenues--is the percentage formula to compute the profit margin ratio, a figure that expresses profits as a percentage of revenues.
Example:
Using the 2009 Annual Income Statement for Apple, Inc., the gross profit was $13,140 (in millions of dollars) and the total revenue was $36,537 (in millions of dollars).
13,140.0 divided by 36,537 = 0.3596, or a gross profit margin of 36 percent.
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Tips & Warnings
Generally the higher the profit margin with respect to a company's same industry competitors, the more profitable and efficient the company.
Gross profit margins tend to remain stable over time, and significant fluctuations can be evidence of accounting irregularities.
