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in this video we're gonna talk about the

profit margin the gross margin and the

operated margin so let's talk about the

profit margin also referred to as the

net profit margin so this value is equal

to the net income divided by the annual

sales of the company or the sales for

the last twelve months

times a hundred percent now keep in mind

the net income is the difference between

the sales which is the same thing as the

revenue minus all of the expenses so I'm

going to write te for total expenses so

let's look at an example so let's

analyze two companies let's just call

this company a and Company B so let's

say that company a had sales of a

hundred million just to use nice numbers

and Company B have the same annual sales

of a hundred million now the total

expenses for company a let's say it's 80

million whereas the total expenses for

Company B for that year

we're gonna say it's 50 million so which

company has the larger profit margin

would you say it's Company A or B well

first we need to calculate the net

income for each company so then that

income is the difference between the

sales and the total expenses so 100

minus 80 that's gonna be 20 million in

that income for company 8 for Company B

then that income is going to be a

hundred minus 50 so it's gonna be 50

million now the profit margin for

company a is going to be the net income

/ the cells so you have 20 million / a

hundred million times 100% so company

aim is going to have a profit margin of

20 percent so what this means is that

20% of the sales were generated as net

income now let's calculate the profit

margin for Company B so company B had 50

million in net income and the annual

sales is a hundred million we're going

to multiply that by a hundred percent so

50 divided by a hundred is 0.5 0.5 times

100 percent that's equal to 50% so

Company B has a profit margin of 50

percent so this tells us that 50% of the

sales were in net income so 50 percent

of a hundred is 50 now let's look at

this from another perspective so let's

say company a had sales or revenue of

let's use 1 billion now let's say

Company B had the same actually let's

use the same number let's use a hundred

million 100 is a nice number now we're

gonna say that Company B had the same

sales just like before but this time I'm

going to give you the profit margin so

let's say that company a has a profit

margin of 30 percent whereas Company B

has a profit margin of let's say 20

percent what is the net income for each

of these two companies to calculate the

net income it's simply the sales

multiplied by the profit margin divided

by 100

so the profit margin is 30% as a decimal

that's 0.3 zero so 30 divided by 100 is

point three zero

so really defined on that income you

just got to find out what 30 percent of

a hundred is 30 percent of a hundred is

thirty so then that income for company a

is thirty million using this formula it

would be a hundred million times 30

percent divided by 100 so these will

cancel you'll just get 30 now

Company B has the same annual cells but

a profit margin of 20 percent 20 percent

of 100 million is 20 million and so if

you know the annual sales of the company

and you know the profit margin this can

give you a good idea of the net income

that this company is makin now let's go

back to the formula that we had before

so we said that the profit margin is the

net income divided by the sales times

100 percent and the net income is

basically the sales or the revenue minus

the expenses over the sales which is the

same as the revenue so as we increase

the revenue what happens to the profit

margin will it increase or decrease as

the revenue increases and if the

expenses are held constant the profit

margin increases as the expenses

increases the profit margin decreases so

you have two ways in which you can

increase the profit margin increase the

revenue or decrease the expenses so

that's another concept that you need to

understand which is pretty intuitive but

it's good to have that down in your

notes let's work on this problem a

company generated 800 million in sales

over the last 12 months the cost of

goods sold is 500 million and operating

expenses were 600 million total expenses

for the business

was 640 million for that year calculate

the gross profit margin and the

operating profit margin and the net

profit margin so let's start with the

gross profit margin which I'm gonna

abbreviate as GM gross margin the gross

margin is going to be the difference

between the sales and the costs of goods

sold which we can be vade that as CEO GS

and all of that is going to be divided

by the sales times 100% so the sales in

this example is 800 million the cost of

goods sold is 500 million and we're

going to divide that by 800 million and

then multiply by a hundred percent so

eight hundred minus 500 that gives us a

gross margin of 300 million but we want

to get the gross margin as a percentage

so we need to divide it by the cells so

300 million divided by 800 million if

you cancel the two zeroes in the M it's

going to be three over eight so 3

divided by 8 times 100 that gives us a

percentage of 37.5% so that's how we can

calculate the gross profit margin as a

percentage

now let's move on to Part B calculate

the operating profit margin the

operating margin is going to be the

operating income divided by the sales

times a hundred percent now the

operating income is the difference

between the sales and the operating

expenses which I'm going to write a so

II so let's go ahead and calculate that

first so the company has eight hundred

million in annual sales and the

operating expenses for that year were

six hundred million so that leaves

behind an operating income of two

hundred million so now to calculate the

operating margin it's going to be the

operating income of two hundred million

divided by the sales of eight hundred

million and then times one hundred

percent so this is going to be 2 divided

by eight times 100 and so the operating

margin as a percentage for this example

is twenty five percent now let's

calculate the net profit margin so

that's going to be the revenue or the

sales minus the total expenses which we

can write as te divided by the sales

over the revenue so the company had

eight hundred million in revenue or

annual sales total expenses were 640

million

so if we subtract 800 million by 640

million that gives us a net income of

160 million over 800 million keep in

mind the profit margin is the net income

over the sales times 100 percent that's

another way in which you could represent

the formula some showing you different

ways in which you might see it presented

to you so 160 divided by 800 that's 0.2

times 100 percent so this company has a

profit margin or a net profit margin of

20 percent so now you know how to

calculate the gross margin the operating

margin and the profit margin now let's

move on to our next example using the

income statement below calculate the

missing values and then calculate the

gross profit margin the operating profit

margin and the net profit margin so feel

free to pause the video if you want to

work on this example so the missing

values that we're missing are the total

operating expenses the operating income

and finally than that income so let's

start with this one the total operating

expenses so here are all of the

operating expenses so we need to find a

sum of those values so it's going to be

428 million plus 64 point three plus

twenty five point seven plus fourteen

point six plus twelve point four so the

total operating expenses are five

hundred and forty five million now we

need to calculate the operating income

the operating income is the difference

between the revenue and the total

operating expenses so we have a revenue

of nine seventy five and the total

operating expenses are five hundred and

forty five so let's subtract those two

numbers nine seventy five million minus

four I mean five forty five million

so that's gonna give us an operating

income of 430 million now the last thing

we need to do is calculate the net

income so the net income is going to be

the revenue minus all of the expenses or

the total expenses so it's gonna be 975

minus all of the operating expenses

which is 545 that gives us the operating

income and then we need to take all

these numbers into account now we need

to determine which of these numbers are

positive and which ones are negative

income should be added expenses should

be subtracted so the fifteen point two

million is that positive or negative

because it can be income or expenses now

typically when you see a number in

parentheses particularly with our

financial statements that indicates a

negative number

and of course income taxes that's

negative that's an expense so we don't

have parentheses here which tells us

that this number is positive and the

same is true for the extraordinary items

so right now subtracting these two

numbers gave us an operating income of

430 million and then we're going to add

fifteen point two million to that and

then we're gonna subtract by forty six

point five million and then subtract by

three point four and then add by six

point seven so you should get four old

two million for those of you who missed

that here's the math so we took the

revenue of 975 million subtracted by the

total operating expenses of 430 million

that gave us the operating income I mean

- 545 million that gave us an operating

income of 430 million and then we added

fifteen point two minus forty six point

five minus three point four and then

plus six point seven so that should give

you 402

now let's start with part 8 let's

calculate the gross profit margin so

recall that the gross margin is going to

be the difference between a sales and

the cost of goods sold and then divided

by the sales times 100 percent so the

sales or the revenue is nine hundred

seventy five million the cost of goods

sold in this case that would be the cost

of revenue that's four hundred and

twenty eight million divided by the

sales times a hundred percent so 975 -

for twenty eight that's 547 547 divided

by nine seventy five is 0.56 one so

times 100 percent this gives us a gross

margin of 56.1% so that's the answer for

Part A now let's move on to Part B let's

calculate the operating margin so the

operating margin is going to be the

operating income divided by the sales

times a hundred percent so we can see

that the operating income is four

hundred thirty million the sales or the

revenue is nine hundred seventy five

million

so four thirty divided by nine seventy

five times a hundred that's going to be

forty four point one percent so that is

to operate a margin for this problem now

the last thing we need to do is

calculate the net profit margin or

simply the profit margin so that's going

to be the net income divided by the

sales times one hundred percent so we

can see that the net income is four

hundred and two million the sales is

nine hundred and seventy five million

times one hundred percent

and that's gonna be 41.2% so now you

know how to calculate the gross margin

the operating margin and the profit

margin given a sample income statement

thanks for watching