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Margin Generalisation

Can we state that whenever absolute profits are down, margins can never increase?

The other situation, however, is possible: profits are up, margins can increase or decrease depending on situation.

Cheers!

Can we state that whenever absolute profits are down, margins can never increase?

The other situation, however, is possible: profits are up, margins can increase or decrease depending on situation.

Cheers!

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Hi Anonymous,

you can easily answer it yourself if you start with the definition of your subject:

Margin = Profits / Revenue

Hence, whether margins increase/decrease/stay constant depends on whether the percentage of revenue decline is higher/lower/identical than the profit decline. If revenues have decreased at a stronger rate compared to profits, then the margin increases despite decreasing costs.

Simple example:

  • Year 1: EUR 10 million revenue and EUR 7 million costs. Hence profits amount to EUR 3 million (margin = 30%).
  • Year 2: Costs have been reduced to EUR 6 million, but also revenue went downhill to EUR 8.8 million. Hence profits have decreased to EUR 2.8 million, while the margin has increased to 32% (2.8 / 8.8).

Hi Anonymous,

you can easily answer it yourself if you start with the definition of your subject:

Margin = Profits / Revenue

Hence, whether margins increase/decrease/stay constant depends on whether the percentage of revenue decline is higher/lower/identical than the profit decline. If revenues have decreased at a stronger rate compared to profits, then the margin increases despite decreasing costs.

Simple example:

  • Year 1: EUR 10 million revenue and EUR 7 million costs. Hence profits amount to EUR 3 million (margin = 30%).
  • Year 2: Costs have been reduced to EUR 6 million, but also revenue went downhill to EUR 8.8 million. Hence profits have decreased to EUR 2.8 million, while the margin has increased to 32% (2.8 / 8.8).

(edited)

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Hi,

That's not correct. The profits can be down even in the situation of the product margin increase if there is a decrease in volumes

Best,

Hi,

That's not correct. The profits can be down even in the situation of the product margin increase if there is a decrease in volumes

Best,

(edited)

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Hi,

It simply depends what "margin" refers to :

- if it refers to absolute margin then indeed margin don't increase when absolute profits are down

- if it refers to variable margin then margin can increase or decrease whil absolute profits are down

Best
Benjamin

Hi,

It simply depends what "margin" refers to :

- if it refers to absolute margin then indeed margin don't increase when absolute profits are down

- if it refers to variable margin then margin can increase or decrease whil absolute profits are down

Best
Benjamin

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