Profit margin

Profit margin

Indicator of profitability. The ratio of earnings available to stockholders to net sales. Determined by dividing net income by revenue for the same 12-month period. Result is shown as a percentage. Also known as net profit margin.

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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 marginan 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.

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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.