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

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 Articles
  1. Gross Profit is one of several important measurements of a company's profitability.
    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. Investing

    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 profit by selling a product for more than it costs to produce. This is ...
  4. How is a company being run? Is it generating profits?
    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.
  5. Markets

    A Look At Corporate Profit Margins

    Take a deeper look at a company's profitability with the help of profit margin ratios.
  6. Operating profit is the profit generated from the core business of a company before accounting for interest and taxes.
    Investing

    Operating Profit

    Operating profit is the profit generated from the core business of a company before accounting for interest and taxes.
  7. A business's gross margin is a rough gauge of how profitable its operations are.
    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 ...
  8. Active Trading

    Warren Buffett: How He Does It

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

    Spotting Profitability With ROCE

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

    Margin

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

You May Also Like

Hot Definitions
  1. Christmas Island Dollar

    The former currency of Christmas Island, an Australian island in the Indian Ocean that was discovered on December 25, 1643. ...
  2. Santa Claus Rally

    A surge in the price of stocks that often occurs in the week between Christmas and New Year's Day. There are numerous explanations ...
  3. Commodity

    1. A basic good used in commerce that is interchangeable with other commodities of the same type. Commodities are most often ...
  4. Deferred Revenue

    Advance payments or unearned revenue, recorded on the recipient's balance sheet as a liability, until the services have been ...
  5. Multinational Corporation - MNC

    A corporation that has its facilities and other assets in at least one country other than its home country. Such companies ...
  6. SWOT Analysis

    A tool that identifies the strengths, weaknesses, opportunities and threats of an organization. Specifically, SWOT is a basic, ...
Trading Center