Profit Margin
BusinessGlossary term
Definition
A financial metric that measures what percentage of revenue a company keeps as profit after accounting for costs and expenses. There are several types of profit margin, including gross margin, operating margin, and net margin, each measuring profitability at different levels of the business. Higher profit margins generally indicate a more efficient and financially healthy business, though acceptable margins vary significantly by industry.
Related terms
- Gross MarginThe percentage of revenue remaining after subtracting the direct costs of producing goods or services, known as cost of goods sold (COGS). Gross margin measures how efficiently a company produces its products and is calculated by dividing gross profit by total revenue. A higher gross margin means the company retains more money from each dollar of sales to cover operating expenses, debt, and profit.
- Net MarginThe percentage of revenue that remains as profit after all expenses, including operating costs, interest, taxes, and depreciation, have been deducted. Net margin is often considered the most comprehensive measure of a company's overall profitability and is sometimes called the 'bottom line.' It is calculated by dividing net income by total revenue and helps investors compare the profitability of companies across different industries and sizes.
- RevenueThe total amount of money a business earns from selling its products or services before any expenses, taxes, or costs are deducted. Revenue is often referred to as the 'top line' because it appears at the top of the income statement. While revenue growth is important, it does not necessarily indicate profitability since a company can have high revenue but still operate at a loss if expenses exceed income.
- Operating ExpensesThe ongoing costs a business incurs through its normal day-to-day operations, not including the direct costs of producing goods or services. Operating expenses include items like rent, salaries, utilities, marketing, insurance, and office supplies. Keeping operating expenses under control is essential for profitability, and the ratio of operating expenses to revenue is a key indicator of a company's operational efficiency.
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