Profit Margin

AAA

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.

VIDEO

Loading the player...
RELATED TERMS
  1. Assessable Profit

    Taxable income payable after accounting for allowable deductions. ...
  2. Capitalization Of Profits

    Converting a company's retained earnings, which represent the ...
  3. Profit Target

    A predetermined point at which an investor will exit a trade ...
  4. Profit-Volume (PV) Chart

    A graphic that shows the relationship between a company's earnings ...
  5. Profitability Index Rule

    A regulation for evaluating whether to proceed with a project ...
  6. Pretax Profit Margin

    A company's earnings before tax as a percentage of total sales ...
RELATED FAQS
  1. What advantages does EBTIDA-margin have over other profitability ratios?

    The advantages that EBITDA margin has over other profitability ratios is that it measures a company's financial performance ... Read Full Answer >>
  2. What are the different types of price discrimination and how are they used?

    Price discrimination is one of the competitive practices used by larger, established businesses in an attempt to profit from ... Read Full Answer >>
  3. What are the risks of relying on EBITDA margin data when making an investment?

    There are two specific risks of relying on EBITDA margin data when making an investment decision: the EBITDA margin isn't ... Read Full Answer >>
  4. What are examples of businesses that exhibit social responsibility?

    In the 21st century, companies that exhibit corporate social responsibility are winning high marks from consumers and investors ... Read Full Answer >>
  5. What are some common risks that are unique to investing in the electronics sector?

    The electronics sector presents several potential risks for investors. Variable costs associated with production may vary, ... Read Full Answer >>
  6. How can I use the load factor as an indicator for the profitability of the airline ...

    A high load factor indicates that an airline has full planes with most seats occupied by passengers. Airlines have high fixed ... Read Full Answer >>
  7. What does break-even analysis tell a business about its shutdown point?

    Break-even analysis tells a company how many months it has left to operate based on the amount of expected cash flow and ... Read Full Answer >>
  8. Which commodities are the main input materials for the automotive sector?

    The automotive sector uses a wide range of materials in manufacturing. Metals such as aluminum and steel, advanced plastics ... Read Full Answer >>
  9. What are the disadvantages of backward integration for a mid-sized business seeking ...

    Backward integration allows businesses to obtain control over suppliers and improve supply chain efficiency. Businesses merge ... Read Full Answer >>
  10. Why should an investor include the airlines sector in his or her portfolio?

    The global airline sector is expected to benefit from robust growth as airlines continue to attract more passengers. Demand ... Read Full Answer >>
  11. Why is the EBITDA margin considered to be a good indicator of a company's financial ...

    The EBITDA margin is a considered to be a good indicator of a company's financial health, because it evaluates a company's ... Read Full Answer >>
  12. How does ratio analysis make it easier to compare different companies?

    Ratio analysis provides an investor with tools to analyze a company's financial statements. Investors use ratios to evaluate ... Read Full Answer >>
  13. What are the main reasons for investing in the internet sector?

    The main reasons for investing in the Internet sector are the higher-than-average earnings growth, profit margins and return ... Read Full Answer >>
  14. What is the average profit margin for a company in the oil & gas drilling sector?

    Investors looking for portfolio diversification through sector-specific funds can find multiple opportunities within the ... Read Full Answer >>
  15. What is the average profit margin for a company in the forest products sector?

    Sector-specific funds can provide investors an opportunity to diversify with a wide range of companies, including those operating ... Read Full Answer >>
  16. What is the difference between operating margin and profit margin?

    There are three common profit margin measures used to evaluate a company's financial condition and prospects for growth. ... Read Full Answer >>
  17. What are the sources of funding available for companies?

    Despite all the differences among companies, there are only a few sources of funds available to all firms. 1. They make ... Read Full Answer >>
  18. What would happen to a company's external fund requirements if it reduces the payout ...

    In short, the stronger the company's internal cash flow, and in turn cash position, the less the need to draw on an external ... Read Full Answer >>
  19. 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 ... Read Full Answer >>
Related Articles
  1. Investing

    Gross Profit

    Gross Profit is one of several important measurements of a company's profitability.
  2. Investing Basics

    Analyze Investments Quickly With Ratios

    Make informed decisions about your investments with these easy equations.
  3. Fundamental Analysis

    The Value of Profitability Ratios

    How is a company being run? Is it generating profits? The answer to these questions lies in analyzing the profitability ratios of a company.
  4. Markets

    A Look At Corporate Profit Margins

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

    Operating Profit

    Operating profit is the profit generated from the core business of a company before accounting for interest and taxes.
  6. Fundamental Analysis

    The Gross Margin

    A business's "gross margin" is a rough gauge of how profitable its operations are. It measures how much sales revenue the company retains after all of the direct costs associated with making ...
  7. Active Trading

    Warren Buffett: How He Does It

    We look at the Sage of Omaha's methodology for evaluating value stocks.
  8. Fundamental Analysis

    Spotting Profitability With ROCE

    This straightforward ratio measures whether a company is efficient, money-making or neither.
  9. Investing Basics

    Margin

    Find out exactly what margin is and why it's important.
  10. Fundamental Analysis

    Analyzing Operating Margins

    Find out how to put this important component of equity analysis to work for you.

You May Also Like

Hot Definitions
  1. Fisher Effect

    An economic theory proposed by economist Irving Fisher that describes the relationship between inflation and both real and ...
  2. Fiduciary

    1. A person legally appointed and authorized to hold assets in trust for another person. The fiduciary manages the assets ...
  3. Expected Return

    The amount one would anticipate receiving on an investment that has various known or expected rates of return. For example, ...
  4. Carrying Value

    An accounting measure of value, where the value of an asset or a company is based on the figures in the company's balance ...
  5. Capital Account

    A national account that shows the net change in asset ownership for a nation. The capital account is the net result of public ...
  6. Brand Equity

    The value premium that a company realizes from a product with a recognizable name as compared to its generic equivalent. ...
Trading Center