What is Profit Margin?
Profit margin is a financial ratio that reflects the percentage of profit that a company makes on each dollar of sales. It is calculated by dividing the company's net income (profit) by its net sales and expressing the result as a percentage.
For example, if a company has a net income of $100,000 and net sales of $500,000, its profit margin would be 20% (100,000 / 500,000 = 0.20). This means that for every dollar of sales the company generates, it keeps 20 cents in profit.
Profit margin is an important metric for businesses because it shows how efficient the company is at generating profits from its sales. A high-profit margin indicates that the company is able to keep a large percentage of its revenue as profit, while a low-profit margin means that the company is only able to keep a small percentage of its revenue as profit.
Profit margin can vary significantly depending on the industry in which a company operates and the specific business model it follows. Some industries have inherently higher profit margins than others, while some business models may be more efficient at generating profits than others.