Profit Margin Definition

What is Profit Margin?

Profit margin is a measurement of how much out of every dollar of revenue a company keeps as profit after accounting for all expenses. It is expressed as a percentage and calculated as follows:

Profit Margin = Net Income ÷ Total Revenue x 100

For example, if a company has net income of $30 million and total revenue of $100 million, its profit margin would be 30%. That means that for every dollar the company generates in revenue, it keeps 30 cents as profit after all expenses are accounted for.

Profit margins can vary greatly by industry. For example, companies in the retail industry typically have very low profit margins because they have to compete on price and may have high costs associated with inventory and physical stores. On the other hand, companies in the tech industry often have much higher profit margins because they may have less competition and higher barriers to entry.

Investors often pay close attention to a company’s profit margin because it can be a good indicator of how efficient the company is at generating profits. A company with a higher profit margin is usually more profitable than a company with a lower margin. However, it’s important to compare companies within the same industry when looking at profit margins because companies in different industries will naturally have different margins.

There are several factors that can affect a company’s profit margin. Some are within the control of management, while others are not. For example,