What Is a High-Low Profit Margin?
Profitability and sales are two of the most important accounting elements that business managers consider when talking about business models. High-low margin is business jargon used by managers to refer to businesses that can operate profitably even without much sales volume. Understanding a high-low profit margin can help you discern the relationship between profit margin and sales turnover.
Profit margin is an accounting technique used to measure the ability of a business to generate net profit. Net profit divided by sales and multiplied by 100 will give you the net profit margin in percentage terms. The margin shows what percentage of sales is converted into net profit. Comparing your margin with margins of competitors in the industry allows you to measure your profitability.
A business is said to have a high profit margin when its margin is higher than industry-average profit margins. Industry-average margins are used as standards to know if margins of a particular company are normal. A high profit margin is indicative of high operational efficiency and profitability.
Sales turnover refers to the number of times the company sells its entire inventory during a given period. The turnover rate gives you an idea of how well a company is managing its inventory. The more goods a company is able to sell, the higher the sales turnover ratio. Dividing the total sales for the period by average inventory in units yields the sales turnover rate. A sales turnover rate that is above the industry-average rate is considered to be high.
Business managers sometimes use the term "high-low profit margin" to express the relationship between net profit and sales volume. The “high” in this term refers to profitability, while the “low” refers to sales volume. A business is said to have a high-low margin when its profit margin is high while its sales turnover is low. The term pertains to businesses that generate a high profit margin from products that have a low sales turnover rate, such as heavy equipment manufacturers and construction companies. Such business does not depend on high sales volume to generate profits but is able to cover both expenses and high profits at low sales turnover.