Profitability Ratios

Finance a la shmoop what are margins well these are Marge

Inns..but they have nothing to do with what we're talking about here the term [Marge Inn hotels]

margin refers to various definitions of profit but a margin isn't a number it's

a fraction indicating what it costs a seller to sell something your profit [Man selling whoopie cushions]

after selling a $2.00 whoopee cushion that costs you 50 cents to make is a

buck 50 so your profit margin was 75 percent that's a buck 50 over 2 bucks

got it all right another like if a store sells [Little girl laying on her bed]

a Betsey cries herself to sleep doll for a dollar and that doll cost the

store 60 cents you know to buy the thing from the factory in China then it's

gross profit margin on the doll is 40% and you'd say that the product had gross

profit of 40 cents on that unit but these figures don't include the cost of [Man picking up a doll for his daughter]

hiring the employees to sell the dolls, nor the rent or the insurance on the

building nor the electric bill to run the lights nor the security guard who

stands outside and falls asleep against the building on a nightly basis so on [security guard falling asleep]

your typical income statement you've got revenues got expenses of the actual doll

then gross profit ie gross margin their see, then there's operating profit ie

and operating margin and then there's net profit the bottom line got it

after taxes all right well say a starbucks sells [man walking into a starbucks store]

10,000 cups of brain blaster bolivian coffees for seven bucks each it produces

70 grand of revenue in a month the coffee itself plus the barista minimum

wages electricity and other basics cost them 45 grand in that same month well

their gross profit is 25 grand and their gross margin is 25 over 70 or about 36 [gross profit and gross margin of starbucks store]

percent they then have franchise fees and advertising and legal costs and

insurance for the hot splls that burn people in their stores and that cost [man spilling coffee on his lap while driving]

them another 10 grand a month after that 10 grand they have 15 grand in operating

profits and their operating margin is 15 over 70 or about 21 percent

then they pay taxes on that 15 grand of segment of five grand so they have net

profits of ten thousand bucks or net margin of ten over seventy which is err

14% ish - all right why do we call these things margins well it's actually a good

way to remember what they are margins are so named because back in the day of [person writing on a piece of paper]

paper and pen people used to write all their income costs and expenses on a

line and then jot down their profit margin in the where was it oh yeah the

margin yeah we like the Simpsons explanation better will make you feel [Man approaches the desk of the Marge Inn hotel]

like you're home sweet homey