What is “Profit Margin” Meaning?

Profit margin is a key financial ratio that indicates how much profit a company makes for every dollar of revenue. It is calculated by dividing net income by total revenue and multiplying by 100 to get a percentage. This metric is used to evaluate the financial health of a company, especially in terms of profitability and cost management.

Example

"The company’s profit margin increased by 5%, indicating more efficient cost management and higher profitability from their core operations."

How is “Profit Margin” Used in Business?

In business, profit margin is an essential indicator of a company's ability to generate profit relative to its revenue. A higher profit margin often signifies better efficiency in controlling costs and maximizing revenue. It is used by investors to compare companies within the same industry.

Pro Tip

Monitor changes in profit margin over time to assess whether the company is improving its cost management and increasing profitability.

Related Terms

Gross Profit Margin, Operating Profit Margin, Net Profit Margin, Return on Investment (ROI)