Profit Margin

Definition

The profit margin is a ratio that indicates the rate of profit being earned from sales and other revenues.

Calculation

Profit Margin = Gross Profit/Sales

Let's say that Company A had a gross profit of $100 and and total Revenues of $1000.

$100/$1000 = 10% Profit Margin. This means that Company A is making 10 cents on the dollar for each sale.

Why is this important?

The profit margin of a company gives investors and management insights into how profitable a company is and how efficient they are are running the business and creating the product. A higher profit margin means that a company is making more money per item or service sold because they are spending less to produce goods and services.

Financial Glossary Reference

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