【profit（margin）】Profit margin is a key financial metric that measures the percentage of revenue that a company retains as profit after deducting all costs and expenses. It is widely used to assess a company's profitability and efficiency in generating profits from its sales. There are several types of profit margins, each providing different insights into a business's financial health.
Summary
Profit margin is calculated by dividing net profit by total revenue and then multiplying by 100 to get a percentage. It reflects how much profit a company makes for every dollar of sales. A higher profit margin indicates better financial performance and cost control. The three most common types of profit margins are gross profit margin, operating profit margin, and net profit margin. Each type focuses on different aspects of a company’s operations.
Profit Margin Types and Calculation
| Type of Profit Margin | Definition | Formula | Example (in %) |
| Gross Profit Margin | Measures the percentage of revenue remaining after subtracting the cost of goods sold (COGS). | (Gross Profit / Revenue) × 100 | 40% |
| Operating Profit Margin | Shows the percentage of revenue left after covering operating expenses like salaries, rent, and utilities. | (Operating Profit / Revenue) × 100 | 25% |
| Net Profit Margin | Represents the percentage of revenue that remains as profit after all expenses, including taxes and interest, have been deducted. | (Net Profit / Revenue) × 100 | 15% |
Key Takeaways
- Gross profit margin highlights the efficiency of production or service delivery.
- Operating profit margin reflects the effectiveness of core business operations.
- Net profit margin gives an overall view of a company’s profitability after all costs are considered.
Understanding these metrics helps investors, managers, and stakeholders make informed decisions about a company’s financial performance and potential for growth.
