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Margin Generalisation

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!

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Sidi
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updated his answer on Aug 29, 2018
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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).

(edited)

Vlad updated his answer on Aug 29, 2018
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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,

(edited)

Benjamin replied on Aug 29, 2018
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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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