how to calculate pretax profit margin
pretax profit margin only requires two pieces of information from the income statement revenues and earnings before taxes ebt the percentage ratio is calculated by dividing ebt which sometimes may be called pre tax income profit before tax or income before income taxes and appears just above the net income line item by sales and then multiplying the resulting number by 100 pretax margin examplecompany ez supply has an annual gross profit of 100 000 it has operating expenses of 50 000 interest expenses of 10 000 and sales totaling 500 000 the calculation of earnings before taxes is made by subtracting the operating and interest costs from the gross profit 100 000 60 000 ez supply has pretax earnings of 40 000 and total sales of 500 000 for the given fiscal year fy the pretax profit margin is calculated by dividing pretax earnings by sales resulting in a ratio of 8 pretax profit margin vs profit marginoften profit margins after taxes gain more prominence among analysts and investors however it can be argued that tax payments offer little insight into the efficiency of companies and should therefore be stripped out of the equation tax expenditures can make profitability comparisons between companies misleading tax rates vary from state to state are generally out of management s control and aren t necessarily a fair reflection of how a business is performing one alternative comparison ratio is the berry ratio which compares gross profit to operating expense at times the tax expense can be more substantial in a current year than in previous years due to tax penalties and new legislation imposing higher tax rates alternatively the present tax expense may be much lower than it had been in earlier years due to tax credits deductions and tax breaks in this case analysts may be able to decrease earnings volatility by calculating the pretax profit margin limitations of the pretax profit marginthough very insightful pretax profit margins like other financial ratios have limitations for one they cannot be used effectively to compare companies from other sectors as each industry generally has different operating expenses and sales patterns certain sectors are more profitable than others legal services is an example of a high margin profession overheads are low there s little need for big investment costs other than salaries and demand is fairly constant in contrast other sectors such as airlines have to deal with stiff competition fluctuating prices for key materials such as fuel hefty maintenance expenses and countless other costs for this same reason investors should also be cautious about using pretax profit margins when comparing diversified companies serving several industries 