What Percentage of Net Profit in Proportion Analysis Should a Company Have?

What Percentage of Net Profit in Proportion Analysis Should a

In managing a company it is necessary to know if the business is meeting the objectives set. For this we use certain variables. Here we will illustrate some of them, so that you know the percentage of net profit in proportion analysis must have the company. Before we will explain necessary information of the different financial terms.

Ratio analysis

We refer to a detailed quantitative study of the data that the company throws up in its financial statements. Said analysis is based on the balance sheet, cash flow statements, cost and production theory and income statement. In this way they can check the current status of the company, if it is getting worse or better.

Thanks to these ratio studies we can know or know in a personalized way, the performance of the company, as its percentage of net profit. Before going into the matter and calculating the percentage, we must be clear about what the net profit covers.

What is a utility

It is the difference between all the variable and fixed costs involved in marketing and the selling price of a product. So it will reflect the return in favor of the initial investment of the company. There is gross and net profit. Gross profit It is the price that a product or service owns, subtracting the cost to manufacture it. While net profit It is the profit obtained by the company after taxes and expenses.

It is important to consider the calculation of net income, because it makes it easier for us to see the profits obtained from the company. It does not matter if you have made a lot of income or a lot of sales, such data does not indicate that the company is successful. Because if the costs are high and it does not have the ability to return a reasonable profitability, the company has no purpose.

company analyzes the profit calculation

Calculation of net profit

  • It covers obtaining the net sales of the product, not counting returns.
  • Discount costs of sales as the cost of raw materials.
  • We get the gross profit subtracting net sales from costs.
  • Let’s start discounting the related expenses that were involved in the sales and distribution process (salaries, product transportation costs, points of sale). From this, we get the operational utility.
  • We add the income, operating profit and non-operating expenses.
  • Finally, we subtract the legal reserve and taxes.

Calculation by example

Now let’s see all these concepts in practice with an example. A company that manufactures leather footwear. He managed to sell 4,000 pairs of shoes per year. With a sale price of 50 euros each pair. The 25,000 euros is what it cost to produce the 4,000 pairs of shoes. 22,000 euros includes the expenses of the sale process (salaries, rent, etc.). Let’s not forget to add the administrative expenses it covers, billing and stationery of 8,000 euros.

cost chart and a stack of coins indicating profit

The company receives 3,000 euros per year of financial investments, which should not be confused with economic investments. And it records financial expenses in the amount of 5,000 euros per year. Generally, the taxes amount to 30%, as long as there is no legal reserve.

Let’s not forget to calculate the income, multiplying the 4,000 x 50 euros = 200,000. To find the gross profit from sales, we subtract the revenue from the cost of sales. That is, 200,000 – 25,000. The gross profit is 175,000. We discount sales and administrative expenses. It would look like this: 175,000 – 22,000 – 8,000 = 145,000, which is the operating profit. We add financial expenses and discount financial expenses. We will have the ‘profit before tax’ of 143,000 euros.

Finally, from 143,000 we subtract the tax expense of 30%, which is the equivalent of 42,9000 euros. Our net profit is 100,100 euros. To find the percentage of net profit, we divide 100,100 / 200,000 (the total revenue), The result is multiplied by 100. The profit percentage is 50.05%.

Although the explanation looks long, it can be summarized in an organized way with a simple formula made in Excel. Being clear about the concepts to calculate the percentage of net profit, and putting them into practice, will help us to view the behavior and performance of the company. Let us make the right decisions in years to come. Share with us your comments on the topic.

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