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Profit Margin

Learn a primary method investors use to analyze a company's profitability.

DEFINITION of 'Profit Margin'

A ratio of profitability calculated as net income divided by revenues, or net 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 its competitors. Profit margin is displayed as a percentage; a 20\% profit margin, for example, means the company has a net income of $0.20 for each dollar of sales.

Also known as Net Profit Margin.

INVESTOPEDIA EXPLAINS 'Profit Margin'

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.

Imagine a company has a net income of $10 million from sales of $100 million, giving it a profit margin of 10% ($10 million/$100 million). If in the next year net income rises to $15 million on sales of $200 million, the company's profit margin would fall to 7.5%. So while the company increased its net income, it has done so with diminishing profit margins.

Things to remember
  • This ratio is not useful for companies losing money, since they have no profit.
  • A low profit margin can indicate pricing strategy and/or the impact competition has on margins.

To know more about profit margins, read A Look At Corporate Profit Margins and Profitability Indicator Ratios: Profit Margin Analysis.

watch & learn

This short video series will help you deepen your understanding of Profit Margin.

  1. Gross Profit

    Gross Profit

  2. The Value of Profitability Ratios

    The Value of Profitability ...

  3. Operating Profit

    Operating Profit

  4. The  Gross Margin

    The Gross Margin

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