Chartered Financial Analyst (CFA) Level 1 Practice Exam

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What is Pretax Margin defined as?

EBIT / Revenue
Net Income / Revenue
Operating profit / Revenue
Gross Profit / Revenue

The correct answer is: EBIT / Revenue

Pretax Margin is defined as EBIT (Earnings Before Interest and Taxes) divided by Revenue. This margin measures a company's profitability from its operations before accounting for interest expenses and tax payments. By focusing on EBIT, it provides insight into how efficiently a company is generating earnings from its core operations without the influence of its financing structure or tax strategies. This definition highlights the operational performance of the business, making it particularly useful for comparing companies within the same industry, as the margin reflects how well a company is converting revenue into operating profits. The use of revenue in the denominator ensures that the margin is expressed as a percentage, providing a clearer view of profitability relative to total sales.