The margin is the difference between the sales price and the cost of a product or service. It shows how much profit is made on each item sold. For example, if a product is purchased for 50 euros and sold for 100 euros, the margin is 50 euros. The margin is an important indicator of a company's Rate of Return as it shows how much profit is actually left after deducting costs. It helps to review pricing strategies and analyze cost structures to ensure the financial health of the business.
The basics of margins are essential to understanding the financial health and Rate of Return of a business. Here are the most important aspects you should know:
By understanding these fundamentals, you can better assess a company's financial performance and make informed decisions.
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This table provides an overview of the basic differences between margin and profit, including their definitions, calculation methods, purposes and uses.
| Criterion | Margin | Profit |
|---|---|---|
| Definition | Difference between sales price and costs, expressed as a percentage of sales | The amount remaining after deducting all costs from revenue, expressed in absolute figures |
| Calculation | ((sales - costs) / sales) x 100 | revenue - costs |
| Purpose | Evaluation of the Rate of Return as a percentage | Evaluation of the absolute financial result |
| Example | Gross margin, net margin, EBIT margin | Gross profit, net profit, operating profit |
| Usefulness | Comparison of Rate of Return and Efficiency between different companies or industries | Determination of the actual profit or loss of a company |
| Focus | Percentage of Rate of Return | Absolute amount of profit |
| Use | Analysis of efficiency, pricing, cost efficiency | Overall financial analysis, investment decisions, tax calculation |
| Exclusions | May exclude interest, taxes and non-recurring items (e.g. EBIT margin) | Includes all costs, including interest and taxes |
| Timing of measurement | Usually on a continuous basis over time | Can be measured on an annual, quarterly or monthly basis |
There are different types of margin, each of which sheds light on different aspects of a company's Rate of Return. Here are the main types of margin:
The following diagram shows the types of margin that exist and are frequently used.
Each of these margin types provides different insights into a company's financial performance and helps to evaluate and optimize business strategy.
The gross margin is the difference between sales and direct production costs, divided by sales and expressed as a percentage. It shows how much of sales remains after deducting the cost of goods or services.
The net margin is the profit after deducting all costs, including operating costs, taxes and interest, divided by sales and expressed as a percentage. It indicates how much of the turnover actually remains as profit after all deductions.
The operating margin is the difference between sales and operating costs (excluding interest and taxes), divided by sales and expressed as a percentage. It shows the Rate of Return of a company's core business.
The contribution margin is the difference between the sales price and the variable costs of a product. It shows how much a company contributes to covering its fixed costs and making a profit.
The trade margin, also called retail margin, is the difference between the cost price (purchase price) and the selling price, divided by the selling price and expressed as a percentage. It is often used in retail to assess the Rate of Return of goods.
The EBIT margin is a measure of a company's Rate of Return and stands for “Earnings Before Interest and Taxes”. It measures a company's operating profit before interest and taxes as a percentage of sales. It takes into account all operating costs, but excludes financing and tax costs.
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IMPORTANT TERMS FOR margin
| Term | Meaning |
|---|---|
| Margin | Difference between sales price and costs, expressed as a percentage of the sales price. |
| Gross margin | Difference between sales and direct costs of goods sold, expressed as a percentage of sales. |
| Net margin | Profit after deduction of all costs (including operating costs, taxes and interest), expressed as a percentage of sales. |
| EBIT margin | Operating profit (EBIT) before interest and taxes, as a percentage of sales. |
| Contribution margin | Difference between sales price and variable costs, shows contribution to covering fixed costs and profit. |
| Trading margin | Difference between sales price and purchase price, expressed as a percentage of the sales price. |
| Costs | The expenses incurred for the production or purchase of a product or service. |
| Turnover | Total revenue from sales within a certain period of time. |
| Profit | The amount remaining after deducting all costs from sales. |
| EBIT | Earnings Before Interest and Taxes, operating profit before interest and taxes. |
| Cost price | Price at which a retailer purchases a product. |
These terms and their meanings will help you to better understand the various aspects of the margin and how it is calculated.
The calculation of the margin can vary depending on the type of margin. Here are the formulas for the most important margins:
Suppose we have the following figures:
The gross margin indicates the percentage of sales remaining after deducting direct production costs (cost of goods sold).
The net margin shows what percentage of turnover remains as profit after deducting all costs, including operating costs, interest and taxes.
The Earnings Before Interest and Taxes margin or EBIT margin indicates what percentage of turnover remains as operating profit after deducting operating costs (but before deducting interest and taxes).
The trading margin, also known as the retail margin, shows the difference between the cost price (purchase price) and the sales price, expressed as a percentage of the sales price.
The contribution margin shows how much of the sales price after deducting variable costs contributes to covering fixed costs and to profit.
These formulas help to evaluate the Rate of Return and efficiency of a company by looking at different aspects of profit margins.
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Article on the Contribution MarginThis table shows the typical profit margins by industry. The values shown are average values and may vary depending on the specific company and market conditions.
| Branche | Bruttomarge (%) | Nettomarge (%) | Betriebsmarge (EBIT-Marge) (%) |
|---|---|---|---|
| Einzelhandel | 20 - 30 | 2 - 5 | 3 - 6 |
| Technologie | 50 - 70 | 10 - 20 | 15 - 25 |
| Gesundheitswesen | 50 - 60 | 5 - 10 | 10 - 15 |
| Nahrungsmittel und Getränke | 30 - 40 | 5 - 10 | 10 - 15 |
| Automobilindustrie | 10 - 20 | 2 - 5 | 3 - 7 |
| Energie | 20 - 30 | 5 - 10 | 8 - 15 |
| Immobilien | 30 - 50 | 10 - 20 | 15 - 25 |
| Banken und Finanzen | 60 - 80 | 10 - 20 | 15 - 25 |
| Telekommunikation | 50 - 60 | 5 - 10 | 10 - 20 |
| Pharmazeutik | 70 - 90 | 10 - 20 | 20 - 30 |
A good margin is relative and depends heavily on the sector and individual company conditions.
Companies should regularly compare their margins with industry benchmarks and their own historical data to assess their performance and identify opportunities for improvement.
A 50% margin means that the difference between the selling price and the cost is half of the selling price. If you sell a product for 100 euros and it costs you 50 euros, you have a 50% margin.
To calculate a 30% margin, take the cost and divide it by 0.7 to find the selling price that includes a 30% margin.
A good margin in retail is typically between 20% and 30%.
No, margin and EBIT are not the same thing. Margin is a percentage that indicates the Rate of Return, while EBIT is the absolute operating profit before interest and taxes.
A 100% margin means that the sales price is twice as high as the costs. If a product costs you 50 euros, you sell it for 100 euros.
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