Margin Generalisation

margins profitability
Recent activity on Aug 29, 2018
3 Answers
2.0 k Views
Anonymous A asked on Aug 29, 2018

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!

Overview of answers

Upvotes
  • Upvotes
  • Date ascending
  • Date descending
Best answer
Sidi
Expert
updated an answer on Aug 29, 2018
McKinsey Senior EM & BCG Consultant | Interviewer at McK & BCG for 7 years | Coached 350+ candidates secure MBB offers

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)

Was this answer helpful?
Vlad
Expert
Content Creator
updated an answer on Aug 29, 2018
McKinsey / Accenture Alum / Got all BIG3 offers / Harvard Business School

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)

Was this answer helpful?
Benjamin
Expert
replied on Aug 29, 2018
ex-Manager - Natural and challenging teacher - Taylor case solving, no framework

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

Was this answer helpful?
Sidi gave the best answer

Sidi

McKinsey Senior EM & BCG Consultant | Interviewer at McK & BCG for 7 years | Coached 350+ candidates secure MBB offers
429
Meetings
4,922
Q&A Upvotes
78
Awards
5.0
134 Reviews