What is the return on sales and how is it calculated in the annual financial statements?
June 9, 2023 | 50,00 EUR | answered by Alice Heck
Dear Tax Advisor,
My name is Jonas Schäfer and I am the managing director of a small business. In my annual financial statements, I would like to calculate the profit margin in order to get a better overview of the profitability of my company. Unfortunately, I am unsure about how exactly the profit margin is calculated and which key figures need to be considered.
The current state of my company shows that we have generated a stable revenue in recent years, but costs have increased in some areas. I am concerned about whether the profit margin is sufficient and if my company is operating profitably. Therefore, I would like to learn more about the calculation of the profit margin in the annual financial statements, in order to take targeted measures to improve the profitability of my company.
My question to you is: What is the profit margin and how is it calculated in the annual financial statements? Which key figures need to be considered and how can I interpret the profit margin to identify potential problems early and initiate suitable measures?
I thank you in advance for your support and look forward to your detailed explanation.
Best regards,
Jonas Schäfer
Dear Mr. Schäfer,
Thank you for your inquiry regarding the topic of profit margin in the annual financial statements. The profit margin is an important ratio to evaluate the profitability of your company. It shows how much profit is generated per euro of revenue and provides insight into how efficiently your company operates.
The calculation of the profit margin is done by dividing earnings before interest and taxes (EBIT) by revenue. The formula is: Profit Margin = (EBIT / Revenue) * 100. The result is expressed in percentage, allowing you to compare the profitability of your company with others.
To calculate the profit margin in the annual financial statements, you need the relevant figures from your income statement and balance sheet. EBIT can be found in the income statement under "Results of Ordinary Activities". Revenue is reported in the income statement. By dividing these two figures, you will obtain the profit margin.
In order to interpret the profit margin correctly, it is important to know that it heavily depends on the industry. A high value may be common in some industries, while it may be considered too low in others. Therefore, it is advisable to compare the profit margin with industry standards to make a realistic assessment.
A low profit margin may indicate that your company is not operating efficiently enough or has high costs. In this case, you should analyze which areas have experienced cost increases and consider measures to improve profitability. Possible actions could include reducing costs, adjusting prices, or increasing process efficiency.
I hope this explanation helps you and that you can successfully calculate and interpret the profit margin in the annual financial statements of your company. If you have any further questions, please do not hesitate to contact me.
Best regards,
Alice Heck
Tax Advisor
