Profit Margin

A ratio of profitability calculated as gross earnings divided by revenues (or, said another way, gross profits divided by sales). It measures how much out of every dollar of sales a company actually keeps in earnings.

Profit margin is very useful when comparing companies in similar industries. A higher profit margin indicates a more profitable company that has better control over its costs compared to the competitors in the industry. Profit margin is displayed as a percentage a 20% profit margin, for example, which means that the company has a net income of $0.20 for each dollar of sales.

Investopedia Commentary

Looking at the earnings of a company often doesn't tell the entire story. Increased earnings are good, but an increase does not mean that the profit margin of a company is improving. For instance, if a company has costs that have increased at a greater rate than sales, it leads to a lower profit margin. This is an indication that costs need to be under better control.

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See also: After Tax Profit Margin, Du Pont Identity, Net earnings, Revenue

Also spelled: Margin of Profit, Gross Margin

profit margin

1. The relationship of gross profits to net sales in a business. Net sales are determined by subtracting returns and allowances from gross sales, whereupon the cost of goods sold is then subtracted from net sales to obtain gross profit. Gross profit is divided by net sales to obtain the profit marginan excellent indicator of a firm's operating efficiency, its pricing policies, and its ability to remain competitive. See also gross profit margin.

2. Net profit margin of a business, which is calculated by deducting operating expenses and cost of goods sold and dividing the result by net sales. This term is less often used to indicate net profit margin.