Using ratios to analyse companies

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5. Profit margin

Definition: Operating profit as a percentage of sales (or turnover)

Significance:

Profit margin tells you about the underlying profitability of a company's trading activities, not whether it is actually making money for shareholders.

Calculation:

Multiply operating profit by 100, and divide the result by turnover

Example

Profit margin calculator Operating profit £  m Turnover £  m   Profit Margin:       %

Points to note:

Profit margin is calculated before taking account of interest charges or tax.

Yardstick:

Typical margins vary from one business to another, so while 15% might be good in one industry, it would be considered poor in another.

1. Why bother with ratios? 2. A word of warning 3. The P&L and the balance sheet 4. Grouping the ratios 5. Profit margin 6. Return on capital employed (ROCE) 7. Sales as a multiple of capital employed 8. Stockturn 9. Debt collection 10. Payment of trade creditors 11. Cash-to-cash cycle 12. Gearing 13. Interest cover 14. Current ratio 15. Quick ratio (acid test) 16. Earnings ratios 17. Dividend ratios 18. Other ratios 19. Sources of information 20. Conclusion

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