Profit margin can be determined with a profit or with a loss. Profit margins are like scores in a game, because they allow you to compare how well or how bad you performed. A profit margin that results from a loss can show you the degree of losses you suffered compared with other competitors in the same industry. Analyzing a negative margin also can allow you to track your improvement.
Profit margin is the financial ratio used by accountants to gauge profitability of a business. It shows you how much net profit each dollar worth of sales generated over the given period of time. Business managers also use this ratio to measure the overall efficiency of their operations.
Dividing net profit by sales will result in the net profit margin. The figures used in determining the ratio are all lifted from an income statement. Sales are the first line in the income statement, while net profit is the bottom line. Net profit is the result of deducting cost of goods sold and expenses from sales.
An income statement that bears a net profit will have a positive amount, whereas an income statement that reports a net loss will bear a negative value. Sales, no matter how big or small, will always have a positive amount in the income statement. Dividing net loss (negative value) by sales (positive value) will result in a negative profit margin.
A negative margin resulting from a net loss can be used to measure how far you have deviated from industry-average margins. Plotting your margins on a periodic basis, whether positive or negative, will give you an idea how much your losses are improving or deteriorating each month. When losses occur, keeping track of changes and analyzing trends are necessary for effective damage control.
