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CHAPTER 9 Stock Research Checklist—Profi... > Does the Company Have a High Pretax ...

Does the Company Have a High Pretax Profit Margin?

Pretax income is calculated after interest expenses, and deducted from the earnings before interest and taxes (EBIT) and before income taxes are paid. If you concentrate on taxable income, companies have a different strategy to manipulate net incomes. So, to be safe, calculating pretax income will give you the true picture.

Always look for companies with high pretax profit margins. When the economy is in a recession, normally a company will reduce the price of its products to attract customers. If a company has a higher pretax profit margin, it can reduce the price and still post a decent profit margin. On the other hand, if the company already has a low pretax profit margin when the economy enters a recession, the company will usually start generating losses. Multiple years of recession can put a company under financial distress and ultimately land it in bankruptcy. When you are calculating the pre-tax profit-margin percentage, compare companies in the same industry.


  

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