So How Much Margins should a food business have?
Know the Difference Between Margin and Return Ratios
Profitability ratios are divided into two categories: margin ratios and return ratios. The capacity to transform sales dollars into profits is represented by margin ratios. Return ratios show how well a corporation can produce money for its shareholders and owners.
There are five profitability ratios that are critical for most firms under these two categories of profitability ratios. You may start extending and adding new profitability ratios to the mix as you grow more comfortable with these ratios.
What Margin Ratios Should You Pay Attention To?
Gross profit margin, operational profit margin, and net profit margin are the three most important margin ratios for your organization.
THE FIRST RATIO IS THE GROSS PROFIT MARGIN.
The most often used margin ratio is gross profit margin (GPM). It works out how much money is left over after covering the cost of products sold (COGS). On your company's income statement, you'll find the figures you'll need to compute this ratio.
A high gross profit margin indicates that a company is efficient in generating revenue and paying operating costs, taxes, and depreciation.
(total sales – selling price) gross profit margin Equals total sales
OPERATING PROFIT MARGIN RATIO NUMBER TWO
The operational profit margin, often called earnings before interest and taxes (EBIT), measures profits as a proportion of sales before interest and taxes are deducted. It's derived by deducting operational costs from gross profit (these expenses usually include rent, utilities, salaries, administrative and general costs).
Your operational profit margin is a commonly used metric for determining how effectively your company can adjust to a downturn. It can also help assess profitability for seasonal firms, when profits may be lower but operational costs must still be met.
Divide the operating profit by the sales to get the operating profit margin.
The third ratio is the Net Profit Margin.
After all operational and non-operating expenditures are eliminated, the net profit margin shows how much profit your firm produces.
A high net profit margin indicates that your business is successfully running and producing revenue—it shows you're good at cost management and pricing your products or services.
The net profit margin is calculated as follows. Again, the values for this calculation may be found on your income statement:
revenue from net income Equals net profit margin
Return Ratios Should Be Monitored
The return on assets and the return on equity are two important return ratios for your organization. These figure out how much profit you're bringing in for the company's owners and/or shareholders.
RETURN ON ASSETS is the fourth ratio.
The efficiency with which assets are used to create profit is measured by return on assets (ROA). This is important data because it tells the company how successfully it uses its resources and assets to make money.
The following is a basic method for calculating return on assets:
total assets x return on assets = net income
Return on Equity (ROE) is the fifth ratio.
The return on equity (ROE) is an important metric for shareholders and investors in a company. It calculates the return on investment made by investors in the firm, which is essential when looking for new investors. The data for this calculation come from the income statement once again.
Return on equity is calculated by dividing net income by average shareholder equity.