Formula to Calculate Profit Percentage
Profit Percentage formula calculates the financial benefits that are left with the entity after it has paid all the expenses and is expressed a percentage of cost price or selling price. Profit Percentage is of two types a) Markup expressed as a percentage of cost price while b) Profit margin is the percentage calculated using the selling price.
The profit Percentage formula is calculated as follows.
Profit % (Markup) = (Profit / Cost Price) * 100 Profit % (Margin) = (Profit / Revenues) * 100
Calculation Examples of Profit Percentage
Let’s see some simple to advanced examples to understand it better.
Due to heavy demand by CPA and CFA candidates, Joseph, the owner of the stationery shop, purchased 150 pieces of normal calculators at the rate of 35 per piece and 80 pieces of financial calculators at the rate of 115 per piece.
He spent an amount of $2500 on transportation and other charges. He labeled the normal calculators with $50 and financial calculators at $150. He also decided to provide a discount of 5% on every calculator.
Now he wants to know the profit % earned by him.
Use below given data for calculation of profit percentage formula.
Calculation of profit can be done as follows:
Profit = 18525 – 16950
Profit will be –
Profit = 1575
Calculation of profit percentage can be done as follows:
= (1575 / 16950) * 100
Profit % will be –
The annual revenue made by Wayne Inc. Ltd, a Foot-ware manufacturing company, amounted to $100,000 million in the previous year based on the company’s actual receipts and payments. The cash profit is 1% of revenues. The credit sales (not included in annual revenues) made during the year amounted to $2300 million. Wayne charges an annual depreciation of $800 million on its assets.
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Management of Wayne Inc wants to find Book Profits and calculate the profit percentage for both books.
Use below given data for calculation of profit percentage.
Calculation of Cash Profit will be –
Cash Profit = 100000 * 1% =1000
Calculation of Book Profit can be done as follows –
Book Profit = 1000 – 800 + 2300
Book Profit will be –
Book Profit = 2500
Calculation of Book Profit percentage formula can be done as follows –
= 2500 / (100000 + 2300 ) *100
Book Profit %will be –
Mr. Bruce Wayne, a startup investor, wants to invest in a new IT startup based on the profitability of the project. That means the idea that can show a higher profit % will get eligible for fund allotments.
Two companies Oracle and Adobe, present their ideas with the expected revenue generation and associated costs.
Advice Mr. Bruce Wayne to make a decision as to which company should be selected as per the criteria.
Calculation of profit percentage for Oracle can be done as follows:
= (140/ 1,000) * 100
Profit % for Oracle will be –
Calculation of profit percentage for Adobe can be done as follows:
= (280 / 2,250) * 100
Profit % for Adobe will be –
Adobe shows higher revenues of $ 2,250,000 and higher net profits of $280,000 in its income statements than Oracle with revenues and net profits of $1,000,000 and $140,000, respectively. But on calculating the profit percentage of both the companies, Oracle outperforms Adobe with profit% of 14% for Oracle and 12% for Adobe. Hence based on profit percentage, Mr. Wayne should select Oracle for fund allocation.
let’s say Mr. Bruce Wayne won $ 10 million in a lottery 5 years ago and invested all of it in a diversified portfolio as follows:
# After five years, he conducted a valuation of all of his assets and investments in a recent point of time. As per the recent valuation, he wants to know the net profit percentage he has earned during a period of 5 years.
The current valuation of his portfolio is shown as follows:
Calculation of Net Profit can be done as follows:
Net Profit = 10350000 – 10000000
Net Profit will be –
Net profit = 350,000
The calculation can be done as follows:
=350,000 / 10,000,000 * 100
Profit % will be –
Mr. Wayne allocated the max portion in the Equity market and stocks, which results in negative returns due to depressions in both global and domestic market, but since he diversified his portfolio into various assets, he ultimately ended up with a profit percentage of 3.5% and earned an amount of $350,000 on its overall investment.
Relevance and Use of Profit Percentage Formula
- Profit percentage is a top-level and the most common tool to measure the profitability of a business. It measures the ability of the firm to convert sales into profits. i.e., 20% means the firm has generated a net profit of $20 for every $100 sale.
- It not only gauges the capacity of the management to generate higher sales/ revenues but also takes into account how efficiently it reduces its costs.
- The de-facto, standard profitability indicator: the above point basically says that profit percentage is derived from two components.
- Sales and Expenses
- Profit percentage Equation = (Net Sales – Expenses) / Net Sales or 1 – (Expenses / Net Sales)
- So if the ratio of Expenses to Net sales could be minimized, a higher profit % could be achieved.
- So either increases the sales or lower the costs/expenses.
- Investors and financiers like venture capital, private equity, etc. always evaluate the profit percentage of the startup so as to check the potential of the service or product.
- Large corporations have to reveal the expected marginal revenues it is going to generate with the additional funds from issuing debt bonds or equity shares or raising a loan. The companies generally present a future expected profit % figure to its investors.
- The profit % figure is the most frequently used tool by analysts to evaluate stocks in both the primary market (IPOs) and secondary market.
This article has been a guide to Profit Percentage Formula. Here we discuss the calculation of profit percentage along with examples and a downloadable excel template. You can learn more about the financial statement analysis from the following articles –