The financial ratio pretax margin is a measure of the operating efficiency of a company. Pretax margin only requires two inputs from the income statement: revenues and income before taxes.
Pretax Margin (%) = (Income Before Taxes / Revenues) x 100
Also known as pretax profit margin, pretax margin is a ratio of pretax profits (income before taxes) to revenues. As such, higher pretax margins are desirable and indicative of management’s ability to keep operating costs low. Since pretax profit includes the cost of goods sold, operating expenses, as well as interest expense, this measure also takes into account the company’s use of leverage (debt).
Investors and analysts typically evaluate a company’s pretax margin over time, looking for an increase in the measure. When drawing conclusions about the relative performance of a company, benchmark comparisons should be made with competitors in the same industry.
Company A’s income statement indicates income before taxes of $6,031,000 and total revenues of $29,611,000. The pretax profit margin for Company A would be:
= ($6,031,000 / $29,611,000) x 100
= 0.2037 x 100, or 20.37%