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!
Margin Generalisation
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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).
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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,
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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
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