How to Increase Your Profits & Margins - without More Marketing | Net Profit Ratios

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This video is on profit margins by industry, how to increase profit and cash flow solutions with your business development process in this series of business development videos. It also contains

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[improvelifebusinesscountry]

EBIDTA margin

EBITDA is Earnings before Interest,
Tax, Depreciation and Amortization. Management can manipulate their bottom line
by changing the depreciation rates. Moreover, manufacturing companies generally
have higher depreciation figure as against service companies. Financing
decisions can affect the effective tax rate paid by a company. These factors
are a constraint to a meaningful comparative analysis of a company with its
competitors and other industry players. Hence, EBITDA margin is a good measure
for comparing companies across different industries. It is calculated as
follows:

EBITDA Margin= EBITDA / Net Sales

This ratio is useful while comparing
companies which carry large amount of fixed assets subject to heavy
depreciation charges such as a mining company or an infrastructure company,
etc. It is also useful in comparing companies in a mature industry which is in
a consolidation phase. Companies in consolidating industry tend to acquire
significant tangible and intangible assets, such as a brands and copyrights,
which are subject to large amortization charges.

As EBITDA measures the income which
is available to pay interest charges, EBITDA margin is of great importance to
creditors and financial institutions. Companies with higher EBITDA margins are
considered to be less financially risky than companies with low levels of
EBITDA margins. In practice, EBITDA margin is used only while analyzing large
companies with significant depreciable assets, and for companies with a
significant amount of debt financing.

[improvelifebusinesscountry]

Gross Margin ratio:

Gross margin ratio indicates the efficiency of production and pricing
strategies applied by a company. In simple terms, it measures the margin left
after meeting all the manufacturing expenses including labor, material and
other manufacturing costs i.e. the costs which are directly related to the
business. Going by this definition it can be assumed that service industry
players will normally have higher gross margins as compared to players in
manufacturing industries. This is primarily because they have lower
manufacturing costs. Moreover, range of gross margin varies across industries.
The ratio is calculated as follows:

Gross Margin Ratio = Net Sales -
Cost of Goods Sold / Net Sales

Trend of the gross margins over a
period of time provides a better meaningful insight into the business strength
rather than a single year's gross margin figure. A company earning a
consistently high gross margin over couple of years is in a better position to
face the downturn in business cycles. However, a company earning lower but a
consistent gross margin over time is considered to be more stable compared to a
company boasting higher but a volatile gross margin. Significant fluctuations
in the gross margin figure can be a potential sign of fraud or accounting
irregularities.

[improvelifebusinesscountry]

Net Profit Margin

Net profit margin measures the
profit available for distribution amongst shareholders (both equity and
preference) after meeting all the expenses during the given period of time. It
indicates the efficiency of all business activities conducted during the given
period, such as production, administration, selling, financing, pricing, and
tax management. It is calculated as follows:

Net Profit Margin = Net Profit / Net
Sales

Analysis of profit margins along
with the study of a company's cost structure enables the analyst to identify
the sources of business efficiency. The analyst should be aware of manipulation
techniques used for distorting the income statement before drawing any
conclusions based upon the profitability ratios.

[improvelifebusinesscountry]

Profitability ratios are used by investors and analysts to evaluate a company's ability to generate earnings as compared to its competitors and other industry players.
They also highlight the strength and efficiency of a company's business model.
There are two types of profitability ratios; profit margin ratios and rate of
return ratios.

While profit margin ratios are used to judge the efficiency with
which the company earns profits, rate of return ratios provide information of
the efficiency with which the company employees its assets and other available
resources.
Comparison of profitability ratios with other competitors in the
same industry reveals the relative strengths or weaknesses of the business.
Some of the most commonly used profit margin ratios are Gross Margin ratio,
Operating Margin ratio, EBITDA ratio and Net Profit Margin ratio.

[improvelifebusinesscountry]

Operating Margin

Operating profit margin measures the
profitability of a company's normal and recurring business activities. It
enables the analyst to judge the efficiency of a company's core business. Since
operating profits do not include interest and taxes, this ratio does not
indicate the effect of management's financing decisions and is calculated as
follows:

Operating Profit Margin = Gross
Profit - Operating expenses / Net Sales

Operating margin is a measure of
management's efficiency. By applying low levels of fixed costs in its cost
structure a company can maintain a high level of operating margin. This is
important primarily because lower fixed costs grant management more flexibility
in determining prices and acts as a measure of safety during tough times. However,
it is important to note that nonrecurring and one-time expenses, such as cash
paid out in a lawsuit settlement and goodwill write-offs should be excluded
while calculating operating margin ratio. They do not represent a company's
true operating performance and can result in misleading conclusions.

[stewart]

Hypothetically in a market, why would the profit margin decrease?