Segment Margin
What Is Segment Margin?
Segment margin is the amount of profit or loss created by one part of a business. With large companies, just knowing the gross margin for the whole business isn't enough 100% of the time. Knowing the segment margins for every division of the company that produces the two expenses and revenues gives a more accurate picture of where the company is making the most value and where its assets and shortcomings lie. Segment margin can likewise be utilized for figuring out a company's profit for specific geographic districts.
Dissecting segment margins can be valuable for deciding the weakness of a company's overall gross margins. Likewise, some openly held companies must report the profitability of segments of their business to the Securities and Exchange Commission (SEC).
Figuring out Segment Margin
Segment margin analysis is important in light of the fact that it assists management with understanding what divisions or product lines of the business are performing great and which are not. By understanding the different segment margins, management can designate resources appropriately and, if essential, dispense with unprofitable product lines.
Segment margin can likewise be applied to:
- Auxiliaries
- Sales domains
- Geographic districts
- Specific stores
- Divisions or offices
For instance, an athletic shoe company could report its profit margin for the company as a whole. To give greater detail, it could report segment margins — the profit margins for various parts of the business-like ladies' shoes, men's shoes, kids' shoes, and athletic frill. Assuming that the company has numerous areas, it could likewise report the segment (geographic) margins for its Seattle stores, Chicago stores, and Philadelphia stores.
In the event that maybe one business segment is doing particularly well and driving positive performance while the remainder of the company is battling, this could influence how analysts view the company and its valuation. Its valuation may be lower compared to another company, where the gross margins are equivalent however driven evenly by all business segments. The valuation of a company with just a single high-performing segment may be even additionally compromised assuming that segment is expected to shrink in the future due to mechanical movements or different headwinds.
Segment margin ought to be calculated for several periods to decide whether there is a profitable trend or failing to meet expectations segments that should be tended to.
Ascertaining Segment Margin
The segment margin formula is segment revenue minus segment expenses, by which just the factors straightforwardly tied to the segment are incorporated. As such, corporate overhead wouldn't be remembered for segment margin since it isn't straightforwardly engaged with generating revenue or expenses for a specific segment.
For instance, suppose a company created the accompanying numbers:
- Segment revenue: $10 million
- Segment cost of goods sold (or cost of sales): $6 million
- Segment Profit: $4 million
If a manager wanted to show segment margin as a percentage, we would compute it as ((segment revenue - segment expenses)/segment revenue)) * 100.
Utilizing our model over, the segment margin would be: ($10 million - $6 million)/$10 million = .40 or 40% (.40 * 100 to address it as a percentage).
Features
- Segment margin assists with giving an accurate picture of where a company is performing great and where it's not by its assets and shortcomings.
- Segment margin is the amount of profit or loss created by one part of a business.
- Segment margin just considers the segment's revenue and expenses.
