Need up to 30 seconds to load.
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
