Profit margin

Profit margin is a financial ratio that measures the percentage of profit earned by a company in relation to its revenue. Expressed as a percentage, it indicates how much profit the company makes for every dollar of revenue generated. Profit margin is important because this percentage provides a comprehensive picture of the operating efficiency of a business or an industry. All margin changes provide useful indicators for assessing growth potential, investment viability and the financial stability of a company relative to its competitors. Maintaining a healthy profit margin will help to ensure the financial success of a business, which will improve its ability to obtain loans.

It is calculated by finding the profit as a percentage of the revenue.^[1]

${\text{Profit Margin}}={100\cdot {\text{Profit}} \over {\text{Revenue}}}={{100\cdot ({\text{Sales}}-{\text{Total Expenses}})} \over {\text{Revenue}}}$ For example, if a company reports that it achieved a 35% profit margin during the last quarter, it means that it netted $0.35 from each dollar of sales generated.

Profit margins are generally distinct from rate of return.^[2] Profit margins can include risk premiums.^[2]

^ "profit margin Definition". Investor Words. InvestorGuide.com. Retrieved December 17, 2009.
^ ^a ^b Fisher, Franklin M.; McGowan, John J. (1983). "On the Misuse of Accounting Rates of Return to Infer Monopoly Profits". The American Economic Review. 73 (1). American Economic Association: 82–97. ISSN 0002-8282. JSTOR 1803928. Retrieved 17 August 2024.

[:0-1] "profit margin Definition". Investor Words. InvestorGuide.com. Retrieved December 17, 2009.

[j871-2] Fisher, Franklin M.; McGowan, John J. (1983). "On the Misuse of Accounting Rates of Return to Infer Monopoly Profits". The American Economic Review. 73 (1). American Economic Association: 82–97. ISSN 0002-8282. JSTOR 1803928. Retrieved 17 August 2024.

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