Profit Margins: Another Way To Assess Earnings Performance(2)
Let's take profit margins one step further.
There are two types of profit margins.
One is called the after-tax margin, and it calculates the percentage of earnings that come from sales after taxes have been paid.
Let's take one company that earned $10 million from $100 million in sales.
This gives it a profit margin of 10%.
What if this company had to pay $2 million in taxes?
What would that do to the margin?
Well, deduct the $2 million tax payment from the $10 million in earnings and you've got $8 million in earnings.
Divide that by the $100 million in sales, and the margin is now only 8%.
The other type of margin is the pretax profit margin, and -- you guessed it -- it ignores the taxes a company pays.
Analysts and investors scrutinize both numbers.
Some prefer pretax margins because they show realistic profitability without the distortion of varying tax rates.
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