How to Calculate the Profit Margin if You Are Given Sales & Net Income After Taxes

Profit margin measures the percentage of sales a company keeps as income.

A company's profit margin measures the percentage of each dollar of sales the company keeps as income after paying all of its expenses and taxes. A higher number means a company is more profitable. If a company generates high sales, but pays out too much of its revenue in expenses, it may struggle to remain competitive. You can determine a company's profit margin if you know its sales and net income after taxes for a particular accounting period. You can compare a company's profit margin with its profit margins from prior periods and to those of its competitors.

Instructions

1. Determine the known amounts of sales and sales returns and allowances for an accounting period, which a company reports on its income statement. For the following example, use $550,000 in sales and $50,000 in sales returns and allowances.

2. Subtract the amount of sales returns and allowances, which is money a company refunds to unsatisfied customers, from sales to determine net sales. In the example, subtract $50,000 from $550,000, which equals $500,000 in net sales.

3. Determine the known amount of net income after taxes, which a company reports on its income statement. In the example, use $100,000 in net income after taxes.

4. Divide the company's net income after taxes by its net sales. In the example, divide $100,000 by $500,000, which equals 0.2.

5. Move the decimal two places to the right in your result to convert it to a percentage. In the example, convert 0.2 to 20 percent. This means the company keeps 20 percent of every dollar of sales after paying its expenses and taxes.

Tips & Warnings

• You can skip Step 2 if a company has no sales returns and allowances.

References

• AccountingCoach; Financial Ratios -- Income Statement; Harold Averkamp; 2011
• Principles of Accounting; Chapter Five: Special Issues for Merchants; Larry Walther; 2010