Terms and Definitions

All of these unless noted otherwise are from YCharts.com

Gross Profit Margin

Available for:

  • Stocks

Definition

A gross profit margin is the difference between sales and the cost of goods sold divided by revenue. This represents the percentage of each dollar of a company's revenue available after accounting for cost of goods sold.

If a company produces phones and earns $32 million in sales but pays $24 million for the items sold, then the company's gross profit margin would be ($32M - $24M) / $32M = 25 percent.

Cutting costs result in higher gross profit margins. If a company sells phones for 500 dollars and the cost of the producing the phone is $250, the current gross profit margin is 50 percent ((500-250)/500). If the company is able to reduce production costs from $250 to $200, the gross profit margin is 60 percent ((500-200)/500). 

Note : Profit margins are very dependent on sector. Companies that sell bland potato chips may not have very high margins, but will sell a sizable quantity of potato chips. A company that sells consulting services will likely have higher profit margins, but sell lower quantities.

Formula

Gross Profit Margin (Quarterly) = (RevenuesQuarterly - CostsOfGoodsSoldQuarterly) / RevenuesQuarterly
Gross Profit Margin (TTM) = (RevenuesTTM- CostOfGoodsSoldTTM) / Revenues (TTM)

Operating Margin

Available for:

  • Stocks

Definition

Operating margin measures the proportion of revenue left over after paying the variable costs of production. It is an important indicator of efficiency and profitability. 

Operating margins can be used to demonstrate management effectiveness in maintaining costs or increasing revenues. High operating margins, or increasing margins over time, demonstrate management's effectiveness in increasing operating profits, whereas declining operating margins can point out significant weaknesses in company growth. Low operating margins in certain industries may also indicate cost controls (if implemented) could lead to better operating income.

An operating margin of .15 indicates that for each dollar of revenue that comes in, 15 cents will drive to the operating income. Operating margin can be used to make predictions of future operating profits based on revenue growth.

Formula

Operating Income takes into account:
- Revenue
- COGS
- D&A
- Operating Interest Expense
- Operating Expenses (R&D, SG&A, Rent Expense, Pension and Retirement Expense)

It does not include:
- Non-Operating Interest Expense
- Asset Writedowns or Impairments
- Restructuring Charges
- M&A related gains/losses
- Gains/losses from the sale of assets (unless those are core business functions)
- Tax Expenses

Price to Sales (PS) Ratio (Forward 1yr)

Available for:

  • Stocks

Definition

Forward Price to Sales Ratio is the current stock price over the predicted sales per share. While similar to the price to sales ratio, this is a forward looking estimate of a company's sales. 

A forward P/S ratio that is higher than the current P/S ratio means that that sales are expected to decrease at the next period. If you think of P/S Ratio as "how much am I paying for each dollar of sales?" a forward P/S ratio can be thought of as "is my current P/S Ratio justified if sales will change drastically?"

Let's say you purchase a company with a P/S Ratio of 10. Intuitively, this means that for each dollar of sales, you're paying ten dollars for that stake. If the Forward P/S Ratio is 15, this could mean that sales are expected to significantly drop and you could be hypothetically paying 15 dollars per dollar of shares instead of 10!

Formula

Forward Price to Sales is calculated as the current stock price over the expected sales per share of the next period.

If a stock is 600 dollars, the last reporting period's sales per share was 50, and the forward estimate sales was 100, your forward P/S would be 6. (600/100). Your current forward PS ratio would be 12. (600/50).

Note : We do not display negative PS ratios.

Sales and Marketing as a % of Revenue

The amount a company spends on sales and marketing as a ratio of revenue.