The profit margin, also known as the net profit margin, is a financial ratio that helps determine how profitable a company is. It shows how much of every dollar a company earns as revenue, eventually remains as net profit.
The profit margin is calculated by dividing a company's net profit by the total revenue. The result is then multiplied by 100 to express it as a percentage. So, the formula to calculate the profit margin is:
Profit Margin = (Net Profit / Total Revenue) * 100
Imagine we have a company with a net profit of $50,000 and a total revenue of $200,000. We can calculate the company's profit margin as follows:
Profit Margin = ($50,000 / $200,000) * 100 = 25%
This means that for every dollar the company earns as revenue, 25 cents eventually remains as net profit. A high profit margin means that the company is very profitable, while a low profit margin may indicate that the company has high costs in relation to its revenue.