How variants of profits differ from each other

There are basically six variants of profit margins,namely gross profit margin,Ebitda margin,operating profit margin,profit margin including non-core income,pre-tax net profit margin and after-tax net profit margin. Though all these communicate the profitability of an entity,they are not communicating the same thing. Hence,one needs to be careful while reading and inferring these numbers.

Gross profit margin: Gross profit is the excess of revenue over the cost of goods sold. Cost of goods sold,otherwise known as CGS,represents the manufacturing cost of the goods sold. The manufacturing cost of the goods that are not sold is presented as the value of the closing inventory in the closing balance sheet of the company.

But it is very difficult for us to compute the value of the cost of goods sold and closing finished goods for an individual as it

is conceptually difficult to compute the manufacturing

cost and the inventory value for an individual.

Ebitda margin: Ebitda margin is otherwise known as cash profit margin,though it is not correct as a portion of the revenue and operating expenses may consist of non-cash items. However,the advantage of using Ebitda margin for comparing the profitability of two entities or individuals is that it is away from all the factors that cause the difference in the profitability of two individuals. It is the profit for all the investors in an individual or entity.

Operating profit margin (OPM): It is the profit of the entire entity to be shared by all the investors,irrespective of whether they are borrowers or owners. It is different from the Ebitda margin as it is arrived at after subtracting the amount of depreciation and amortisation.

Profit including other income: This includes the income from non-core activities. Note that the other income amount is netted out for the amount of expenses in the non-core activities of the individuals.

Pre-tax profit or income: Interest on borrowings is subtracted from the profit,including other income figure,to arrive at the pre-tax net profit. The pre-tax profit margin is calculated by dividing the pre-tax net income by the total revenue (both core and non-core revenue).

Post-tax net profit margin: Interest on certain kind of borrowings or debt is tax deductible for an individual while interest on all borrowings is tax deductible for a company.

Operating revenue,operating expenses,depreciation and ammortisation,net other income,interest expense and tax expense are the variables that cause differences in the profitability of individuals.

In addition to the above,cost of goods sold also creates differences in the profitability of commercial organisations. The Ebitda margin enables an analyst to compare two individuals before considering the variations in their financials such as the other income,operating and non-operating expenses.

The margin that is to be considered in analysis depends on who are you? If you are a lender,you look at the operating margin ratio and if you are the owner,you look at the after-tax margin and so on.

*The writer teaches accounting and finance courses at IIM Ranchi