Formula to Calculate Profit Percentage

The profit percentage formula calculates the financial benefits left with the entity after it has paid all the expenses and is expressed as a percentage of cost price or selling price. Profit percentage is of two types: – 

a) Markup expressed as a percentage of cost price.

b) Profit margin which is the percentage calculated using the selling price.

The profit percentage formula is calculated as follows:-

Profit % (Markup) = (Profit / Cost Price) * 100Profit % (Margin) = (Profit / Revenues) * 100

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Calculation Examples of Profit Percentage

Let us see some simple to advanced examples to understand them better.

Example #1

Due to heavy demand by CPA and CFA candidates, Joseph, the stationery shop owner, purchased 150 pieces of normal calculators at $35 per piece and 80 pieces of financial calculators at $115 per piece.

He spent an amount of $2,500 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 percentage earned by him.

Solution:

Use the below-given data for the calculation of the profit percentage formula.

Calculation of profit can be done as follows:-

Profit = 18,525 – 16,950

Profit will be: –

Profit = $1,575

Calculation of profit percentage can be done as follows:

= (1,575 / 16,950) * 100

Profit percentage will be: –

Example #2

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 salesCredit SalesCredit Sales is a transaction type in which the customers/buyers are allowed to pay up for the bought item later on instead of paying at the exact time of purchase. It gives them the required time to collect money & make the payment. read more (not included in annual revenues) amounted to $2300 million. In addition, Wayne Inc. Ltd. charges a yearly depreciation of $800 million on its assets.

The management of Wayne Inc. Ltd. wants to find book profits and calculate the profit percentage for both books.

Use below given data for the calculation of profit percentage.

  • Annual Revenues: $100,000Cash Profit: 1%Credit Sales: $2,300Depreciation: $800

Calculation of Cash Profit will be –

Cash Profit = 100,000 * 1% =1,000.

Calculation of Book ProfitBook ProfitBook Profit is the profit amount that a business earns from its operations & activities but has not been realized yet. It is not tracked by analysts or stakeholders & its calculation is relevant only to evaluate a Company’s tax liability. read more can be done as follows: –

Book Profit = 1,000 – 800 + 2,300

Book Profit will be: –

Book Profit = $2,500.

Calculation of book profit percentage formula can be done as follows: –

= 2,500 / (100,000 + 2,300 ) *100

Book profit percentage will be: –

Example #3

Mr. Bruce Wayne, a start-up investor, wants to invest in a new IT start-up based on the project’s profitability. That means the idea that shows a higher profit % will be eligible for fund allotments.

Oracle and Adobe, two companies, present their ideas with the expected revenue generation and associated costs.

Advice Mr. Bruce Wayne to decide which company should be selected 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 percentage 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 both companies’ profit percentages, Oracle outperforms Adobe with a profit percentage of 14% for Oracle and 12% for Adobe. Hence, Mr. Wayne should select Oracle based on profit percentage for fund allocation.

Example #4

Suppose Mr. Bruce Wayne won $10 million in a lottery five 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 at a recent point in time. As per the current valuation, he wants to know the net profit percentage during five years.

The current valuation of his portfolio is shown as follows:-

Calculation of net profit can be done as follows:-

Net Profit = 10,350,000 – 10,000,000

Net Profit will be –

Net profit = $350,000

The calculation can be done as follows:

=350,000 / 10,000,000 * 100

Mr. Wayne allocated the max portion in the equity market and stocks, resulting in negative returns due to depressions in global and domestic markets. Still, since he diversified his portfolio into various assets, he ultimately ended up with a profit percentage of 3.5% and earned $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 considers how efficiently it reduces its costs.The standard profitability indicator suggests that profit percentage comprises two components: –Sales and expensesProfit Percentage equation = (Net Sales – Expenses) / Net Sales or 1 – (Expenses / Net Sales)So if one could minimize the expenses ratio to net sales, it could achieve a higher profit percentage.Therefore, one can either increase the sales or lower the costs/expenses.

  • Investors and financiers like venture capital, private equity, etc., always evaluate the profit percentage of the start-up to check the potential of the service or product.Large corporations have to reveal the expected marginal revenuesMarginal RevenuesThe marginal revenue formula computes the change in total revenue with more goods and units sold." The value denotes the marginal revenue gained. Marginal revenue = Change in total revenue/Change in quantity sold.

  • read more. They will generate the additional funds from issuing debt bonds or equity shares or raising a loan. The companies generally present a future expected profit percentage figure to their investors.The profit percentage figure is the most frequently used tool by analysts to evaluate stocks in the primary market (IPOs)Primary Market (IPOs)The primary market is where debt-based, equity-based or any other asset-based securities are created, underwritten and sold off to investors. It is a part of the capital market where new securities are created and directly purchased by the issuer.read moreprimary market (IPOs) and secondary marketSecondary MarketA secondary market is a platform where investors can easily buy or sell securities once issued by the original issuer, be it a bank, corporation, or government entity. Also referred to as an aftermarket, it allows investors to trade securities freely without interference from those who issue them.read more.

This article has been a guide to the profit percentage formula. We discuss the profit percentage calculation, examples, and a downloadable Excel template here. Also, you can learn more about the financial statement analysis from the following articles: –

  • Sales and expenses

  • Profit Percentage equation = (Net Sales – Expenses) / Net Sales or 1 – (Expenses / Net Sales)

  • So if one could minimize the expenses ratio to net sales, it could achieve a higher profit percentage.

  • Therefore, one can either increase the sales or lower the costs/expenses.

  • Markup MeaningMarkup MeaningThe percentage of profits derived over the cost price of the product sold is known as markup. It is determined by dividing the company’s total profit by the cost price of the product and multiplying the result by 100.read moreFormula of Gross ProfitFormula Of Gross ProfitGross profit formula is calculated by subtracting the cost of goods sold from the net sales where Net Sales is calculated by subtracting all the sales returns, discounts and the allowances from the Gross Sales and the Cost Of Goods Sold (COGS) is calculated by subtracting the closing stock from the sum of opening stock and the Purchases Made During the Period.read moreMargin vs. MarkupFormula of Operating Profit Margin