What is "working margin"

Operating margin is a margin ratio used to evaluate a company's pricing strategy and operating efficiency.

Operating margin is a measure of how much of a company's revenue is left behind after payment variable costs of production such as wages, raw materials, etc. It can be calculated by dividing a company's operating income (also known as "operating income") for a given period by net sales for the same period. “Operating income” here refers to the profit a company retains after removing operating expenses (such as cost of goods sold and wages) and depreciation. “Net sales” here refers to the total value of sales minus the cost of returned goods, surcharges for damaged and missing goods, and discounts.

The operating margin is expressed as a percentage, and the formula for calculating the operating margin can be represented as follows:

The operating margin is also often known as the "operating margin", "operating "return on sales", or "net profit margin". “However, 'net margin' can be misleading in this case, as it is more commonly used to refer to a different net margin ratio.

Highest Operating Margin in S&P 500 Lowest Operating Stock in S&P 500

BREAKING DOWN "Operating Margin"

Operating margin gives analysts an idea of ​​how much a company makes (before interest and taxes) on every dollar of sales. Generally speaking, the higher a company's operating margin, the better company. If a company's margins increase, it earns more per dollar of sales.

For an example of calculating operating income, let's say Company A earns $12 million per year, with $9 million worth of goods sold and $500,000 depreciation. Let's also assume that Company A generates $20 million in sales this year, with $1 million in returns, $2 million in damaged and missing items, and $1 million in rebates. Company A's operating margin this year is:

($12M - $9M - $0.5M) / ($20M - $1M - $2M - $1M) = $2.5M / $16M = 0.1563 = 15. 63%

With an operating margin of 15.63%, Company A earns about $0.16 (before interest and taxes) for every dollar of sales.

A company's operating margin often determines how much a company can satisfy creditors and create value for shareholders by generating operating cash flow. A healthy operating margin is also required for a company to be able to pay its fixed costs, such as interest on debt, so a high margin means a company has less financial risk than a company with low margins.

For example, if company A has an operating margin of 4% on net income of $10 million and company B has an operating margin of 11% on net sales of $20 million, company A may have difficulty covering its fixed costs if the business declines in a particular year. Company B, on the other hand, has a comfortable buffer to account for difficult financial times.

When determining the operating margin, it is important to consider the nature of the operating costs that you include in your calculations. Operating expenses are often considered "fixed" or "variable". “Adjusted operating expenses are expenses that remain stable over time, even as business activity and revenues fluctuate. Some examples of fixed costs include rent paid on facilities and interest on debt, as these costs are often determined at predetermined rates. On the other hand, variable operating expenses change with changes in the business. One example of a variable operating expense is the cost of raw materials, as the total cost of raw materials will rise as demand and sales of manufactured goods increase.

Often irrevocable cash flows, such as cash paid in the claim are excluded from the calculation of operating profit as they do not represent the true operating performance of the company.

When calculating operating margins, expenses are also often referred to as "cash expenses" or "non-cash expenses". “Unlike cash spending, non-cash spending does not require a cash outlay. For example, for calculations, the cost of equipment that is expected to last ten years would be divided by those ten years, with annual calculations for that period accounting for 10% of the equipment cost. This difference largely explains the difference between operating income and operating cash flow.

Use of "operating margin"

Basic functional margin operating system, as mentioned above, is the ability to evaluate the performance of a company or its profitability. However, by using it in different ways, it is possible to clarify some things about a company or industry that cannot provide a single operating margin for the company.

For example, operating margins can be calculated on a quarterly or yearly basis, which is useful when evaluating a company's history of operations. A savvy investor can often track a company's operating margin over time (perhaps over the last four, eight, or twelve quarters) to determine whether a company's margin has been historically consistent or its operating margin has grown steadily. For example, a company with a high operating margin in the current quarter, but a low operating margin over the previous seven quarters, probably needs further attention. Due to its history of operation, it may not be necessary to rely on these high operating margins to remain stable.

Operating margin can also help an investor take an even closer look at a company, as it can be used to analyze a specific project within a company, not just the company itself. Projects can vary greatly in size, but operating margin can still be used to research a specific project or compare multiple projects within a company.

"Operating Margin" Limits

Like any ratio that is determined to evaluate a company's performance and profitability, operating margin has an important set of limitations that a reasonable investor might consider.

First, operating margin calculations do not take into account investment capital who launched the company in the first place. This is especially important when considering young companies, as they may be working to offset start-up costs, which may not be reflected in operating profit.

In addition, when trying to calculate operating margins for specific projects within a company, there may be some overhead costs involved. Many companies have overheads that are not tied to one specific project but rather to the entire company. One common example of such costs is the cost of wages employees working at the company's headquarters who may oversee and support all or many of the company's projects.

Also, like all ratios used in ways like this, operating margins should only be used to compare different companies when they are in the same industry, and ideally when they have the same business models and revenue figures. Companies in different industries can often have vastly different business models, so they can also have very different operating profits, making comparisons of their operating profits relatively meaningless.

For getting additional information on this topic, see the description of analytic fields.

It depends on two components: income and expenses.

Growth rates of income and expenses

Comparison of the growth rates of these components makes it possible to assess which of them had a positive or Negative influence at a profit.

• TRD— income growth rate;
• D 1— the bank's income in the reporting period;
• D 0- the bank's income in the previous period;
• TPP— growth rate of expenses;
• R 1— Bank's expenses in the reporting period;
• P 0- the bank's expenses in the previous period.

Income Growth Elasticity Coefficient

The income growth elasticity coefficient is calculated, which is defined as the ratio of the growth rate of income to the growth rate of the bank's expenses. If this coefficient is greater than one, then this indicates an economical use of funds, and, conversely, if it is less than one, then this is an uneconomical use of funds.

The value of the elasticity coefficient for interest income usually exceeds one, for non-interest income, as a rule, it is less than one.

Level of coverage of non-interest expenses by non-interest income

The level of coverage of non-interest expenses is important in banking practice. interest income:

• D n— non-interest income;
• R n- non-interest expenses.

The value of this indicator in foreign banking practice is set at 50, i.e. the level of non-interest income must be at least 50% of non-interest expenses.

Profit structure ratios

It is necessary to identify the degree of impact of various active operations of the bank on the formation of its profit. To do this, the coefficients of the profit structure are used:

• K1, K2, K3— coefficients of the profit structure;
• D chko- net income from credit operations;
• D btsb— net income from operations with securities;
• D chpo— net income from other operations;
• P- profit.

By calculating these coefficients, those operations of a commercial bank that bring him the largest share of profit are identified.

Indicators of profitability and profitability

The main performance indicators of the bank's activities are traditionally considered indicators of profitability, profitability (profitability).

The profitability of various banking operations is determined through indicators:

• net interest margin;
• operating margin.

Net interest margin

Net interest margin calculated by the formula

• NIM— net interest margin;
• D p— interest income for the period;
• R p— interest expenses for the period;
• A d- Income-generating assets.

Operating margin

Operating margin— profitability of the bank's main operations. It is calculated according to the formula

• D josn— net income from the main banking operations;
• A d- Income-generating assets.

Net income from core banking operations is calculated by summing up:

• net interest income;
• net income from foreign exchange transactions;
• net income from operations with securities;
• net income from leasing operations;
• net income from operations with precious metals.

Profitability of other operations calculated by the formula

• D chpo- net income from other operations;
• A d- Income-generating assets.

Net income from other operations is the sale (disposal) of property, write-off of accounts receivable, accounts payable, lease of property, and other operations.

The profitability of commission transactions is calculated using the formula

• D to— profitability of commission transactions;
• D chk— net commission income;
• A d- Income-generating assets.

profit spread

The traditional measure of a bank's profitability is profit spread:

• D p— interest income;
• R p— interest expenses;
• A d— earning assets;
• P in- Liabilities of the bank, on which interest is paid.

The spread measures how well the bank performs the function of an intermediary between depositors and borrowers and
how fierce competition is in the banking market. Increasing competition generally results in a narrowing of the gap between average asset returns and average liability costs. In this case, provided that all other factors remain unchanged, the bank's spread decreases, which forces the bank to look for other ways to make a profit.

This indicator is also valuable in that it isolates the impact of interest rates on financial results of the bank's activities, thus allowing a better understanding of the vulnerability of the bank's income-generating operations. Comparison of this indicator with the similar indicator for the group of related banks, as well as with the average calculated for Russia or the region, will make it possible to assess the effectiveness of the bank's interest rate policy.

Comparison of profitability indicators makes it possible to identify the most efficient operations of the bank, taking into account the ROA indicator, to determine also the operations that affect the change in the financial result. In doing so, it must be borne in mind that:

• the indicator of the operating margin indicates the place in the active operations of the bank of traditional banking operations (loan operations, operations with securities and operations with foreign currency);
• a significant excess of the return on assets indicator over the net interest margin indicator characterizes the bank's ability to receive interest income and indicates a high specific gravity in the assets of the bank assets not related to interest income, or the presence of a significant share of commission income in the bank's income.

Therefore, it is necessary to consider the rate of return on commission transactions. The low value of this indicator indicates the bank's insufficient attention to the development of new banking services, which is one of the reserves for increasing the bank's profitability.

Comparison of profitability indicators in dynamics for a number of reporting dates and their comparison with the average values ​​for the corresponding group of banks allows us to determine trends in the growth (decrease) of profit, determine the factors that had the greatest impact on its change, draw a conclusion about financial stability bank and determine the reserves to improve the efficiency of the bank.

Bank profitability

The profitability (yield) of a commercial bank is usually defined as the ratio of balance sheet profit to total income:

• P total— profitability of the bank;
• P- profit;
• D - bank income.

The overall level of profitability allows you to evaluate the overall profitability of the bank, as well as the profit attributable to 1 rub. income (share of profit in income). This is the main indicator that determines the effectiveness of banking activities.

Profit per employee of the bank is a mechanism for cumulative assessment of the profitability of all bank personnel:

• P h— net profit of the bank;
• OCHP - total strength personnel.

The level of profitability of a commercial bank is estimated using financial ratios. The system of profitability ratios includes the following main indicators:

• the ratio of profit and equity;
• the ratio of profit and assets;
• profit to income ratio.

The methodology for calculating these indicators depends on the accounting and reporting system adopted in the country.

The numerator of these financial ratios is always the estimated financial result of the bank's activities as of the reporting date. Under the current system of accounting and reporting in Russia, the numerator is the balance sheet profit, with foreign standards accounting is net income.

Return on capital

World practice shows that the determining indicator of the effectiveness of bank capital is the maximization of the value of equity capital while maintaining an acceptable level of risk. Along with the market price of the bank's shares, an important indicator for evaluating the bank's performance is the ratio of net profit to share capital (ROE in foreign practice). This indicator characterizes how effectively the funds of the owners were used during the year, i.e. it is a measure of profitability for bank shareholders. It establishes the approximate amount of net profit received by shareholders from investing their capital.

In domestic practice, the profitability of capital is calculated by the formula:

• PC— profitability of capital;
• P B— balance sheet profit for the period;
• SC- the amount of equity capital in the period.

The rate of return on capital characterizes the ability own funds make a profit and allows you to evaluate the possibility of ensuring real growth of equity capital in amounts adequate to the growth of business activity.

The resulting value of capital profitability is recommended to be compared with capital adequacy indicators (an increase in the first indicator while a decrease in the value of the second indicates an expansion of the range of risky operations).

Profitability of assets

Return on assets (ROA) is one of the main coefficients that allows to quantify the bank's profitability.

• ROA - profitability of assets;
• ПБ - balance sheet profit;
• And - the total asset balance for the period.

The profitability of assets characterizes the ability of the bank's assets to generate profit and indirectly reflects their quality, as well as the effectiveness of the bank's management of its assets and liabilities.

A low ratio may be the result of a conservative credit policy or excessive operating costs; a high value of the indicator indicates the successful disposal of assets.

This indicator can be modified:

A d- Income-generating assets.

The difference between these two indicators indicates the bank's ability to increase its profitability by reducing the number of non-income-generating assets.

In foreign practice, the numerator of these indicators is net profit.

It should be noted that under conditions the growth rate of profitability of assets and capital should be higher than the average inflation rate.

When managing profitability, the values ​​of profitability of assets and capital should be compared with the average value for the respective group of banks.

Indicators of profitability of assets and profitability of capital are fundamental in the system of financial profitability ratios of the bank. However, high profits are associated, as a rule, with high risks, so it is necessary to simultaneously take into account the degree of protection of the bank from risk.

Updated on 01/17/2019 at 18:19 20 139 views

EBITDA (Earnings before interest, taxes, depreciation and amortization) is earnings before interest, taxes and depreciation. The EBITDA calculation is used to measure a company's operating profitability, as it only takes into account those expenses that are necessary for the "day-to-day" running of the business. However, due to its flexibility, a significant difficulty arises when using EBITDA as an indicator of profitability: since the calculation of EBITDA on the balance sheet is not officially regulated, companies can manipulate this indicator, presenting the business as more profitable than it actually is.

To analyze the financial health of a company and get a complete picture of its profitability, corporate financiers and investors carefully study financial reports and balances. This process uses a range of metrics and related financial ratios to measure profitability. As a rule, analysts consider standardized profitability measures set out in generally accepted accounting principles - GAAP and IFRS, since they are easily comparable between enterprises and industries. At the same time, there are indicators not related to them, but also widely used in practice. One of them is EBITDA.

For example, only operating income is used as the source of income in the calculation. With this definition of profit, EBITDA is most closely related to operating profit. At least in theory, excluding asset depreciation costs is the only real difference between the two figures. Since operating income is shown in the company's income statement, the easiest way to calculate EBITDA is to start with a GAAP/IFRS figure and work backwards (EBITDA formula 1)

EBITDA = Operating profit + Depreciation expense

EBITDA Calculation Example

For example, for the fiscal quarter ending June 30, 2017, the company had operating income of $128.79 million and depreciation expense of $29.05 million. The above formula for calculating EBITDA in this case will give the following result:

$128.79 million + $29.05 million = $157.84 million

However, many companies interpret the name of this indicator literally, including all expenses and sources of income, regardless of their connection with the main operations. Under this method, EBITDA is calculated from net income plus a write-off of taxes, interest and depreciation. This calculation formula allows any additional income from investments or secondary operations, as well as one-time payments for the sale of an asset, to be included in profit. (EBITDA calculation formula 2):

EBITDA = Net Income + Interest + Taxes + Depreciation + Amortization

Using the example above, in addition to depreciation expense, the company has a net income of $70.28 million, taxes of $56.43 million, and $2.08 million in interest. quarterly payments. Within the framework of this calculation model EBITDA for the same fiscal quarter will be:

$70.28 million + $2.08 million + $56.43 million + $29.05 million = $157.84 million

It is worth noting that EBITDA formulas can give different results. The difference in EBITDA calculations could be explained by the sale a large number equipment or high investment returns, but if these parameters are not explicitly specified, the result can be misleading. An unscrupulous company can easily use one calculation method this year and switch to another the next year to overestimate its performance. If the calculation method remains the same from year to year, EBITDA will be very useful for comparing historical performance.

The difference between operating margin and EBITDA

Operating margin and EBITDA are two measures of a company's profitability. Although they are related, they show different profit measurements and different points. financial analysis For the company.

Operating margin, also called operating profit margin, is one measure of a company's profit margin. It is calculated as a percentage of total sales revenue, with all costs of doing business accounted for in the formula, excluding taxes, interest, investment gains or losses, and any gains or losses from events outside of the company's normal business operations, such as sale of real estate, buildings, etc. Costs included in the calculation of operating margins include salaries and benefits for employees and independent contractors, administrative expenses, the cost of parts or materials needed to manufacture goods sold by the company, advertising and depreciation costs. Operating margin calculations help companies analyze and reduce the variable costs associated with doing business.

While there is some overlap between the figures used to calculate operating margin and EBITDA, EBITDA is generally considered to be more closely related to net income, as net income provides the base amount from which EBITDA is calculated. Net income is a rough estimate of a company's profitability, as it includes all company costs and expenses, taxes, interest, one-time or extraordinary expenses, and amounts that are not included in the calculation of operating income. EBITDA is the sum of net income with taxes, interest, depreciation added to that amount. Thus, EBITDA includes both measures that are usually classified under net income (taxes and interest) and the figure that is usually classified under operating income (amortization).

EBITDA margin and risks of using EBITDA in investment appraisal

There are two specific risks when making an investment decision if an investor relies on EBITDA margin data:

• EBITDA margin is not a good indicator of the performance of companies with expensive or borrowed equipment;
• EBITDA margins can mask the fact that some companies have high EBITDA but low net income and margins.

EBITDA margin measures a company's earnings before interest, taxes, and depreciation as a percentage of its total revenue. The EBITDA margin can be calculated as follows:

EBITDA margin = EBITDA/total revenue

For investors, EBITDA margin is good way assess the potential of a planned investment as it provides insight into a company's performance without taking into account financial decisions, accounting decisions and many tax conditions. EBITDA margins can also give an investor a deeper understanding than a company's profitability ratios. The EBITDA margin does not include non-operating effects of the company's activities such as depreciation, taxes and interest payments.

Although EBITDA is of some interest to investors, it has a number of disadvantages as the main argument in making a decision. For example, companies operating in industries that require a large amount of fixed assets, such as manufacturing, will not provide investors with accurate EBITDA margin performance characteristics. Fixed assets, usually purchased on credit, have interest payments that are not included in EBITDA and high depreciation, which is also not included in EBITDA. While EBITDA is a useful measure of performance, it does not take into account a company's net income, which can be very low for an investor and signal that an investment will be underperforming.

So EBITDA is useful for comparison net profitability various companies in terms of making decisions related to financing and accounting. But when using this indicator, investors need to take into account the presence of certain risks.

Explanation of the essence of the indicator

Profitability products sold by profit from sales (English equivalent - Operating Income Margin) - a profitability indicator that measures the amount of operating profit (gross profit minus other operating expenses) generated by each ruble of sales.

Operating profit margin measures the percentage of money that is left after deducting cost of goods sold and other operating expenses from revenue. A higher operating margin also means less financial risk for the company and the ability to pay its fixed costs, such as paying off interest bearing liabilities.

The indicator is calculated as the ratio of profit from sales to the total amount of sales.

Standard value:

Obviously, the higher the operating profit margin, the better the company performs its activities. As a general rule, businesses that show a trend towards higher operating profit margins also show improved overall cost management.

Rosselkhozbank considers such indicators to be normative:

Table 1. Normative value of the indicator, %

Source: Vasina N.V. Modeling the financial condition of agricultural organizations in assessing their creditworthiness: Monograph. Omsk: Publishing house of NOU VPO OmGA, 2012. p. 49.

Directions for solving the problem of finding an indicator outside the normative limits

If the value of the indicator is lower than the normative or desired value, then it is advisable to look for opportunities to reduce operating costs, namely, distribution costs, management costs, maintenance costs. production process, other operating expenses. For example, such activities could be the use software, which will release part labor resources, optimization of expenses for maintaining the work of the office, optimization of expenses for Marketing communications etc.

Calculation formula:

Return on sales by profit from sales = Profit from sales / Revenue * 100%

Dynamics of the indicator in Russia

Rice. 1. Dynamics of the average operating margin in Russian Federation(excluding small companies)

Data Federal Service state statistics

In the past few years, due to the difficult macroeconomic situation, there has been a decrease in the indicator compared to the period of 2004-2008. At the end of 2015, each ruble of revenue generated 9.3 kopecks of sales profit.

Calculation example:

JSC "Web-Innovation-plus"

Unit of measurement: thousand rubles

Profitability of sold products in terms of profit from sales (2016) = 1100/3721 * 100% = 29.56%

Profitability of sold products in terms of profit from sales (2015) = 1112/3841 * 100% = 28.95%

Despite the decline in sales of Web-Innovation-plus in 2016, the company's operating margin increased, which indicates more effective management operating expenses in 2016. At the end of the study period, each ruble of sales made it possible to receive 29.56 kopecks of sales profit. Factors for improving operational efficiency include reducing the cost of products and services and optimizing commercial expenses.

In macroeconomics, a term such as margin is often used, what it is and how to correctly calculate this indicator - important questions. To begin with, you should familiarize yourself with the translation of the word margin, so, with of English language it means "difference". Margin has several types with their own characteristics.

What is margin?

This term has several interpretations, so, more often it is understood as the difference between revenue and cost of goods. The indicator is absolute, and helps to understand the overall success of the enterprise in the main and additional activities. Another way to explain what margin is in simple terms, is the profit received taking into account the total revenue and total costs of providing a service or creating a product. It is worth noting that this parameter is used only for internal statistics and analysis.

If the term "margin" is used in financial sector, then it will be the difference in interest rates or in valuable papers Oh. It is also used in banks to describe the difference between and loans. You should also find out - margin, what is it in trading. So, this concept refers to the amount of interest added to the purchase price in order to make a profit.

Margin and profit - what's the difference?

On the territory of Russia, the margin is an analogy for net profit, so there is not much difference between their calculations. It is important to keep in mind that here we mean profit, not margin. Margin and profit differ in that the first term is a special analytical indicator that is used for exchanges and in the banking sector. The margin specified by the broker is importance for a trader.

What is the difference between margin and markup?

Many often confuse these two concepts, so they equate them, thereby making a mistake. To understand the difference between margin and markup, you should consider their meaning. So, the first term is understood as the ratio of the profit received to the established market price. As for the margin, it is equated to the ratio of the profit received from the sale of goods to the calculated cost. The following main distinguishing features can be distinguished:

1. The markup has no limits, but the margin cannot reach 100%.
2. When calculating the margin, the base is the cost of goods, but for the margin, the total income of the organization is important.

Margin - main types

It has already been said that the margin is used in many areas, which leads to the presence of its different types. Let's consider some of them:

1. Initial. Describes the amount of equity capital required to conduct a margin transaction in accordance with the law.
2. Actual. Finding out what margin means, it is worth pointing out that this type is understood as the share of equity in the value of the transaction as of the current date. This parameter is calculated every day.
3. Minimum. Shows the level of available capital in the value of a margin trade. If the share of the client's own funds has decreased to the minimum margin, then the broker may require to make up for the lack of a security deposit, or he may independently sell part of the client's existing securities.
4. Free Margin. Often this term is used in Forex trading, and it shows the difference between assets and liabilities. This is the total amount of funds that are in the account, but they are not related to liabilities.

Operating margin

This term is used to calculate the ratio of an organization's operating profit to its income. With it, you can determine the amount of revenue as a percentage, which will remain after deducting the cost and other related expenses. With the help of operating margin, you can understand how much a company earns or loses from each dollar of sales. It is considered a more complete indicator of the quality of work than, for example, gross. A high margin indicates a good performance of the company, but it is important to consider that these figures can be used.

Gross margin

This term is understood as the difference between the total revenue received from the sale and variable costs. This is a calculated indicator used to determine a number of other indicators. Gross profit margin cannot show total financial condition enterprises. It is often used to determine net profit, and on its basis, company development funds are formed. Gross margin is used in analysis to characterize the performance of a company.

net margin

This refers to the difference between average cost involved financial resources and the average return on the capital that was invested. This margin is not used in trading, but in the banking sector, the parameter is very important. Management model financial organization requires stabilization of the margin, that is, the difference between interest income and costs, with acceptable risk. Describing the net margin, what it is, it is worth pointing out the factors that affect its value:

1. A jump or fall in interest rates.
2. Change in the spread, that is, the difference between the profit of assets and the costs of servicing the bank.

Interest margin

This concept is used in banking, since it is one of the most important indicators, since it characterizes the ratio of revenue to expenditure. Bank margin helps to understand the profitability of lending operations and the ability of a financial institution to cover its own costs. Interest margin can be absolute or relative. The value of this indicator is influenced by inflation rates, various active operations and the ratio of existing capital to resources attracted from outside, and other factors.

Variation margin

This type of margin indicates the amount of money that a trader can receive, given the change in the value of the futures on the exchange. It shows how the value of a contract changes at the end of a trading session. The variation margin in Forex will be positive only if the trades are profitable. It expresses the amount that a participant in exchange relations pays or receives as a result of changes in monetary obligations, that is, this is the amount credited to the account after the completion of trading on the exchange.

As a result of trading, the margin level may change, so, when making a successful transaction and making a profit, the variation margin will have a positive value. If the transaction was unprofitable, then it will be charged from the trader's account, and this is back margin. When a trader holds his position for only one session, then the results of the transaction will be equal to the variation margin, and if it is for a long time, then it will be added every day.

How to calculate margin?

Since in many areas the margin can mean different indicators, then its formula is different. In economics, this concept is often understood as the difference between the cost of production and its selling price. With it, you can understand whether the company is successfully turning income into profit. The calculation of the margin is very simple and it is expressed as a percentage, so you need to divide profit by revenue and multiply by 100. For example, if the margin is 25 percent, then we can conclude that every dollar of revenue brings 25 cents of profit, and the remaining 75 are expenses. .