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  Post #24 (permalink)   02-24-2011, 01:20 PM
Frank Hagan
HD Newbie
Join Date: Feb 2011
Posts: 15

Status: Frank Hagan is offline
A lot of us are throwing out numbers, and I realize some who say margins are slim may be thinking in terms of net margins, while those of us saying shoot for 100% margins ... I use 85% in my business ... may be talking about gross margins. So here are some definitions and how margins are calculated:

Definition of Gross Margin:

What Does Gross Margin Mean?
A company's total sales revenue minus its cost of goods sold, divided by the total sales revenue, expressed as a percentage. The gross margin represents the percent of total sales revenue that the company retains after incurring the direct costs associated with producing the goods and services sold by a company. The higher the percentage, the more the company retains on each dollar of sales to service its other costs and obligations.

Formula: Gross Margin=((Sell Price - Cost of Goods ) / Sell Price)
I do a gross margin calculation on each product or service I sell. My overhead is otherwise low, but even so there is a big difference between an individual product or service's gross margin and my company's net margins.

Definition of Net Margin:
Net margins will vary from company to company, and certain ranges can be expected from industry to industry, as similar business constraints exist in each distinct industry. A company like Wal-Mart has made fortunes for its shareholders while operating on net margins less than 5% annually, while at the other end of the spectrum some technology companies can run on net margins of 15-20% or greater.

Most publicly traded companies will report their net margins both quarterly (during earnings releases) and in their annual reports. Companies that are able to expand their net margins over time will generally be rewarded with share price growth, as it leads directly to higher levels of profitability.
The formula for net margin takes into account not only the cost of all goods, but also all other expenses the company incurs:

Net Margin = (Net Profit/Total Revenue)

Where "Net Profit" is the difference between total costs and total revenue. To get the margin percentage, you divide net profit by the total revenue as shown in the formula.

Savvis, a large company that provides hosting for businesses and owns data centers (among other things) has their financial information published since they are public. I don't know of any "hosting only" companies that are also public, but there may be some. It would be interesting to see their 10K reports.

The recession has hit Savvis hard, as their net income for 2009 was -20 million (negative numbers are bad). In 2007, before the recession, they had net income of 250M+.

Looking at 2007, they had 794M in revenue, with 454M in costs, for a GM of 75%. Down at the bottom of the chart, they had 251M in net profit, for a net profit margin of about 32%.

So if you ask Savvis, they could say they have a margin of 75% (gross margin), but there is really only 32% (net profit margin).

(If I've done the math correctly!)
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