Explain the operating profit margin - performance ratios, Financial Management

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Operating profit margin

Operating profit margin    =   (PBIT / Turnover) x 100%

This is the ratio of operating profit to turnover or sales. A high operating profit margin is due higher sales prices or low costs. Other factors to consider comprise inventory valuation, bulk discounts, overhead allocation and sales mix.

Low profit margins aren't generally good news since it suggests poor performance. But there may be other factors to consider relating to business activities and industry. For illustration the company may be entering a new market which requires low selling prices.

 


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