| profit margin 1. The relationship of gross profits to net sales in a business. Net sales are determined by subtracting returns and allowances from gross sales, whereupon the cost of goods sold is then subtracted from net sales to obtain gross profit. Gross profit is divided by net sales to obtain the profit margin  an excellent indicator of a firm's operating efficiency, its pricing policies, and its ability to remain competitive. See also gross profit margin.2. Net profit margin of a business, which is calculated by deducting operating expenses and cost of goods sold and dividing the result by net sales. This term is less often used to indicate net profit margin. |
Profit margin. A company's profit margin is derived by dividing its net earnings, after taxes, by its gross earnings minus certain expenses. Profit margin is a way of measuring how well a company is doing, regardless of size.
For example, a $50 million company with net earnings of $10 million and a $5 billion company with net earnings of $1 billion both have profit margins of 20%.
Profit margins can vary greatly from one industry to another, so it can be difficult to make valid comparisons among companies unless they are in the same sector of the economy.
The difference between the cost of a unit (house,subdivision parcel,condominium) including a pro rata share of all overhead and other such expenses, as compared to the sales price for that unit.
What Does Profit Margin Mean?
A ratio of profitability calculated as net income divided by revenues or net profits divided by sales. It measures the dollar amount of the sales that a company actually retains in earnings. Profit margin is very useful in comparing companies in similar industries. A higher profit margin indicates a more profitable company. Profit margin is displayed as a percentage; a 20% profit margin, for example, means that the company has a net income of $0.20 for each dollar of sales.
Investopedia explains Profit Margin
A company's earnings do not always 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's costs are rising at a faster pace than are sales, this will lead to a lower profit margin, indicating that the company should rein in its costs. Consider a company that has 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 will fall to 7.5%. Although the company has increased its net income, it has done so with diminishing profit margins.
Related Terms:
• Gross Margin
• Net Income—NI
• Operating Margin
• Profitability Ratios
• Revenue
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