Profit Margin

Profit Margin

What Is Profit Margin?

Profit margin is one of the commonly used profitability ratios to gauge the degree to which a company or a business activity makes money. It represents what percentage of sales has turned into profits. Simply put, the percentage figure indicates how many cents of profit the business has generated for each dollar of sale. For instance, if a business reports that it achieved a 35% profit margin during the last quarter, it means that it had a net income of $0.35 for each dollar of sales generated.

There are several types of profit margin. In everyday use, however, it usually refers to net profit margin, a company’s bottom line after all other expenses, including taxes and one-off oddities, have been taken out of revenue.

KEY TAKEAWAYS

• Profit margin gauges the degree to which a company or a business activity makes money, essentially by dividing income by revenues.
• Expressed as a percentage, profit margin indicates how many cents of profit has been generated for each dollar of sale.
• While there are several types of profit margin, the most significant and commonly used is net profit margin, a company’s bottom line after all other expenses, including taxes and one-off oddities, have been removed from revenue.
• Profit margins are used by creditors, investors, and businesses themselves as indicators of a company's financial health, management's skill, and growth potential.
• As typical profit margins vary by industry sector, care should be taken when comparing the figures for different businesses.