Margin is often confused with markup. What's the difference?
The dollar value is the same.
Margin % is the dollar profit divided by sales.
Markup % is the dollar profit divided by cost of goods sold.
Which one should be used?
Typically markup is used by sales teams to determine customer pricing.
Margin % is the standard in financial reports.
Use both - but be sure you are consistent and clear in how the percentage is calculated.
If a company makes an investment in a new factory/plant/division, should it use OROI or ROE? What's the difference?
OROI measures operating profit and doesn't take interest or tax into account.
ROE takes interest and debt into account.
Which should be used?
Operational managers - sales managers, production & distribution managers - should use OROI.
Business owners, CFO, CEO - should use ROE.
Every business owner or CEO should be aware of gearing. By borrowing money to fund profitable investments we can increase the return on the shareholders' investments.
The analogy is a gear in a car or a machine - the gears let us put in the same force to produce more output.
We input less cash (shareholder funds) and use debt to fund the rest of the investment.
The investment is producing the same operating profit, but we (shareholders or business owners) have put in less equity.
The result is that the return on equity increases.
