What is a good Profit Margin?
In general, is there a particular number that may be considered a "good" profit margin, or are there just too many variables (size and type of business, type of industry, etc) to allow for that simple of an answer.
I don't think one number in general would be good for everyone to go by. I think there are a lot of differences that come into play. By putting a particular number for a "good" profit margin can be very misleading for everyone. The profit margin should be established by each individual business/company.
There are to many variable's that can contribute to your profit margin and since they change on a daily basis it is rather difficult to assses the good from bad.
The concept of a "good" profit margin is dependent on many factors. Moreover, I feel there are two standards that a company measures itself against. First, is the industry standard based on the industry that you are part of. If you are in the telecommunications industry, then analysts on Wall Street especially, will measure your companyâ€™s performance against other telecommunications companies---this helps account for variability in how the industry is performing during good and bad times. Second, is the standard of how your company has done in the past. How does this yearâ€™s profits match against last years? How do the ratios for liquidity, debt structure, activity, and profitability stack up against the past five years? This helps to ascertain how the management is doing. Furthermore, management guidance for the future will be also used as a measure and will be a forecast of company performance and discounted in the stock price level. The challenge management has is convincing shareholders that they are doing all they can to maximize share price thru activities that maximize profit.
There are several factors that come in to play with a 'good' profit margin. Profit on any level is great however, different companies may have different goals for the future,i.e. like expansion, and so what they want to take home or pay out to shareholders/stakeholders could differ dependent on reinvestment/expansion dollars
Thanks Roselyn for your observations. It does vary - keeping in mind that profit is actually a paper figure. More and more organizations are turning to cash flow and their financial ratios as performance indicators.
Profit margin is mostly used for internal comparison. It is difficult to accurately compare the net profit ratio for different entities. Individual businesses' operating and financing arrangements vary so much that different entities are bound to have different levels of expenditure, so that comparison of one with another can have little meaning. A low profit margin indicates a low margin of safety: higher risk that a decline in sales will erase profits and result in a net loss, or a negative margin. Higher net profit margins provide a company with a safety net to meet times of uncertainty in the market place.
*Profit margin is an indicator of a company's pricing strategies and how well it controls costs. Differences in competitive strategy and product mix cause the profit margin to vary among different companies and industry sectors. +For example, the oil industry operates with low net profit margins of 4 to 6%, while companies in the tech and consulting industry often have net profit margins of 15 to 30%.
+http://www.yardeni.com/pub/sp500margin.pdf, October 13, 2013.
I usually contend that "profit" is a paper figure. It does point to a company's sales strength and expense control, but without a cash flow statement and ratio analysis, I wouldn't say profit is the truest indicator of financial leverage or success.
There should be more than one number it not a simple answer many people will have different way to determine profit margin.
One organization that I worked for preferred a profit margin of 35% on educational services sold.