Financial Markets For The Rest Of Us An Easy Guide To Money, Bonds, Futures, Stocks, Options, And Mutual Funds |
Page 226 curbing expenses for that year, allowing it to keep more of its revenues. While this is a good sign, the company's earnings must be considered in the context of its revenues, as it cannot curb expenses indefinitely. See Profit Margin. Profit Margin - This is the ratio of a company's net income to its net sales, expressed in percentage terms. A 50% profit margin means that for every $1 in sales, the company is making 50 cents in profit; a very good margin indeed. The other 50 cents go into paying direct and indirect costs. This value can be used to gauge the efficiency of a company, and the higher the profit margin, the more efficient the company. To maximize profit margins companies must find the maximum price they can charge for their products/services without hurting their revenues (e.g., turning off customers), and they must minimize expenses without compromising their operation (e.g., hurting product quality). The higher this value the better. Gross Margins - This is arrived at by the following the formula: This figure is expressed in percentage terms (i.e., what percentage of each revenue dollar is left after subtracting direct costs). Direct costs are expenses paid directly to set up a service or to manufacture a product such as cost of raw materials used to make a light bulb. This figure shows a company's effectiveness in controlling the costs that go into making its products. The higher this value the better. Operating Margins - This is arrived at by the following the formula: This figure is expressed in percentage terms (i.e., what percentage of each revenue dollar is left after subtracting indirect costs). Indirect costs are the overhead costs that are needed to keep the company in operation. For example, accounting, information technology, and legal … |
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