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Profit margin

What is Profit Margin?

Profit margin is a fundamental metric that shows how much profit a business keeps from every dollar of revenue. It is commonly used by managers, investors, and analysts to assess a company's financial health and efficiency.

There are two main types to consider: gross profit margin and net profit margin. Gross profit margin measures profitability after subtracting only the cost of goods sold (COGS), providing insights into manufacturing and production efficiency. Meanwhile, net profit margin considers all expenses—including operating costs, interest, and taxes—to show the overall profitability of the business.

Calculating profit margin is straightforward. To find net profit margin, for instance, simply divide net profit by total revenue, then multiply by 100 to convert the result into a percentage:

Net profit margin (%) = (Net profit / Total revenue) × 100

Monitoring profit margins is critical, as declining margins may signal rising expenses or competitive pressures. Conversely, higher profit margins typically indicate greater efficiency and better financial stability.

Ultimately, profit margin serves as a valuable benchmark. Consistently analyzing and maintaining healthy margins allows businesses to remain competitive, manage resources efficiently, and achieve sustainable growth over time.

What is the difference between gross profit margin and net profit margin?

Gross profit margin measures profitability after subtracting only the cost of goods sold (COGS), reflecting manufacturing and production efficiency. Net profit margin considers all expenses, including operating costs, interest, and taxes, giving a more comprehensive view of a company's overall profitability.

How do you calculate net profit margin?

Net profit margin is calculated by dividing net profit by the total revenue, then multiplying by 100: Net profit margin (%) = (Net profit / Total revenue) × 100.

Why is it important for businesses to monitor their profit margin regularly?

Regularly monitoring profit margins helps businesses identify rising expenses or competitive pressures early, maintain efficiency, ensure financial health, and support sustainable growth.