Profit margin is one of the firms' quantitative techniques to assess gains or losses generated in a particular trading period. Evaluation of gains or losses enables a company to compare the performance against prior years and compare against its competitors. These measures are known as profit margin.
Profit margin is calculated on four levels, including the gross profit, operating margin, and net-profit margin. These are the measures applied in evaluating Ethan Allen Interior Inc.'s profit margins, an American furniture chain company that operates more than 300 stores in the United States and in countries such as Canada, Middle East and Europe. The evaluation period covers the financial statements for the years 2018 and 2019.
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Table 1
| Gross profit margin |
2019 |
2018 |
| (Gross Profit / Net sales) * 100 |
54.8% |
54.2% |
| Operating Profit Margin | ||
| (Operating income/Revenue) *100 |
4.5% |
6.4% |
| Net Profit Margin | ||
| Net Income/ Revenue *100 |
3.4% |
4.7% |
Source: ("Annual Reports", 2021)
The gross margin ratio indicates the portion of revenues that surpasses the cost of sales. A higher ratio is preferable because it shows the company is successful in managing the cost of sales. Ethan Allen's gross profit marginally increased in 2019 due to the unproportionate reduction in the net sales and cost of sales between the two years. Whereas the net sales dropped by $20,100 in 2019, the sales cost dropped by only $13,627.
Operating profit margin shows how a company's operations contribute to its profitability. Ethan Allen's ratio for 2019 declined 1.9per cent attributed to the decline in net sales and the new component in expenditure for the restructuring and impairment charges. The net effect was an increase in the operating expenses against a backdrop of dropping revenues. The net profit ratio followed a similar trend as the operating profit by dropping by more than a single percentage point due to the declining profitability occasioned by low net sales and increased operating expenses.
References
Annual Reports . https://www.annualreports.com. (2021). Retrieved 10 February 2021, from
https://www.sec.gov/Archives/edgar/data/896156/000143774919016263/eth20190630_10k.htm .
James, M. (2020). https://www.investopedia.com/terms/o/operatingmargin.asp . Investopedia.
Retrieved 10 February 2021, from https://www.investopedia.com/ask/answers/021215/what-difference-between-gross-profit-margin-and-net-profit-margin.asp .
