What is Pre Tax Profit Margin?
The Pre Tax Profit Margin measures the remaining earnings once all operating and non-operating expenses, except for taxes, have been deducted.
How to Calculate Pre Tax Profit Margin (Step-by-Step)
The pre tax profit margin ratio compares a company’s earnings before taxes (EBT) to its revenue in the corresponding period.
EBT, also known as “pre-tax income”, represents the residual earnings after operating expenses and non-operating expenses are accounted for, except taxes.
- Operating Expenses → Cost of Goods Sold (COGS), Selling, General and Administrative (SG&A), Research and Development (R&D), Sales and Marketing (S&M)
- Non-Operating Expenses → Interest Expense, Gain / (Loss) on Asset Sale, Inventory Write-Down or Write-Off
On the income statement, EBT represents a company’s taxable income for book purposes and is the final line item before taxes are deducted to arrive at net income (i.e. the “bottom line”).
Pre-Tax Profit Margin Formula
The pre-tax profit margin (or EBT margin) is the percentage of profits retained by a company prior to fulfilling its required tax obligations to the state and federal government.
The pre-tax margin formula is calculated by dividing a company’s earnings before taxes (EBT) by its revenue.
Since profit margins are expressed in percentage form, the resulting amount from the formula above must subsequently be multiplied by 100.
The pre-tax profit margin answers the following question, “How much in earnings before taxes (EBT) is retained by a company per dollar of revenue generated?”
For example, a pre-tax margin of 40% means that for each dollar of revenue, a company’s EBT is $0.40.
