Before-tax profit margin is a profitability ratio that calculates the percentage of net income that is earned before income taxes are paid. It is used to measure a company's ability to generate earnings before interest and taxes are paid on its debt and other obligations. The higher the margin, the more profitable the company is.
A before-tax profit margin is a calculation of a company's profitability by dividing its before-tax income by its net sales. This calculation provides a measure of how much of each dollar of sales is retained as income before taxes.
To calculate a before-tax profit margin, you need to know a company's before-tax income and net sales. The calculation is:
before-tax profit margin = before-tax income / net sales
The difference between a before-tax profit margin and an after-tax profit margin is that the before-tax profit margin measures a company's profitability on its pre-tax income, while the after-tax profit margin measures a company's profitability on its post-tax income.
This distinction is important because companies can often reduce their tax burden by taking advantage of tax breaks and deductions. For instance, a company that operates in a country with a relatively high corporate tax rate may be able to reduce its taxes by claiming deductions for things like research and development expenses or employee training costs. By contrast, an after-tax profit margin would take into account these tax breaks and deductions, and would therefore be a more accurate measure of a company's true profitability.
An example of a before-tax profit margin would be a company that has a net income of $100,000 and a taxable income of $80,000. The before-tax profit margin for this company would be $20,000/$100,000 or 20%.