Investopedia

Profit Margin

Dictionary Says

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 Says

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.


Related Video for 'Profit Margin'

Articles Of Interest

  1. Spotting Profitability With ROCE

    This straightforward ratio measures whether a company is efficient, money-making or neither.
  2. Analyze Investments Quickly With Ratios

    Make informed decisions about your investments with these easy equations.
  3. Clean Or Green Technology Investing

    Innovations in energy and consumption grow as companies adopt them to reduce costs.
  4. A Look At Corporate Profit Margins

    Take a deeper look at a company's profitability with the help of profit margin ratios.
  5. Understanding Profit Margin

    Learn a primary method investors use to analyze a company's profitability.
  6. Extended Warranties: Should You Take The Bait?

    Avoid shelling out for these policies and you could save hundreds of dollars.
  7. Run Your Finances Like A Business

    Think of yourself as your own little company. To make it run smoothly, you need to take a look at your books.
  8. Microeconomics

    This tutorial teaches the basics of one of the most important economic topics. A must for all investors.
  9. What would happen to a company's external fund requirements if it reduces the payout ratio, or if it suffers a decline in its profit margin?

    In short, the stronger the company's internal cash flow, and in turn cash position, the less the need to draw on an external fund. If internal cash flow or the retention ratio increases, external ...
  10. How rapidly can expanding sales reduce a firm's earnings?

    In order to operate and make money, a company must spend money. Revenue - the dollar amount of sales - can be seen on a company's income statement. From there, various expenses are deducted such ...
comments powered by Disqus
Marketplace
Hot Definitions
  1. Fool In The Shower

    The notion that changes or policies designed to alter the course of the economy should be done slowly, rather than all at once.
  2. Pattern Day Trader

    An SEC designation for traders who trade the same security four or more times per day (buys and sells) over a five-day period, and for whom same-day trades make up at least 6% of their activity for that period.
  3. Cost-Push Inflation

    A phenomenon in which the general price levels rise (inflation) due to increases in the cost of wages and raw materials.
  4. Happiness Economics

    The formal academic study of the relationship between individual satisfaction and economic issues, such as employment and wealth.
  5. Affluenza

    A social condition arising from the desire to be more wealthy, successful or to "keep up with the Joneses." Affluenza is symptomatic of a culture that holds up financial success as one of the highest achievements.
  6. Icarus Factor

    The term Icarus factor describes a situation where managers or executives initiate an overly ambitious project which then fails. Fueled by excitement for the project, the executives are unable to reign in their misguided enthusiasm before it is too late to avoid the failure.
Trading Center