Profit margin

From Wikipedia, the free encyclopedia

This article does not cite any references or sources. (April 2007)
Please help improve this article by adding citations to reliable sources. Unverifiable material may be challenged and removed.

Profit margin, Net Margin or Net Profit Ratio all refer to a measure of profitability. It is calculated using a formula and written as a percentage or a number.

$\mathrm{Profit\ Margin} = \frac{\mathrm{Net\ Income}}{\mathrm{Net\ Sales\ Revenue}}$

The profit margin is mostly used for internal comparison. It is difficult to accurately compare the net profit ratio for different entities. Individual businesses' operating and financing arrangements vary so much that different entities are bound to have different levels of expenditure, so that comparison of one with another can have little meaning.

For example, a company produces a loaf of bread and sells it for 10 units of currency. It cost the company 6 units of currency to produce the bread and it also had to pay an additional 2 units of currency in tax.

That makes the company's net income 2 units of currency (10 - 6, before tax, then minus 2 for tax). Since its revenue is 10 units of currency, the profit margin would be (2 / 10) or 20%.

Profit margin is an indicator of a company's pricing policies and its ability to control costs. Differences in competitive strategy and product mix cause the profit margin to vary among different companies.