Profit Margin
A ratio of profitability calculated as net income divided by revenues, or net profits divided by sales. It measures how much out of every dollar of sales a company actually keeps in earnings.
Profit margin is very useful when comparing companies in similar industries. A higher profit margin indicates a more profitable company that has better control over its costs compared to its competitors. Profit margin is displayed as a percentage; a 20% profit margin, for example, means the company has a net income of $0.20 for each dollar of sales. Investopedia Says:
Looking at the earnings of a company often doesn't tell the entire story. Increased earnings are good, but an increase does not mean that the profit margin of a company is improving. For instance, if a company has costs that have increased at a greater rate than sales, it leads to a lower profit margin. This is an indication that costs need to be under better control.
Imagine a company has a net income of $10 million from sales of $100 million, giving it a profit margin of 10% ($10 million/$100 million). If in the next year net income rose to $15 million on sales of $200 million, its profit margin would fall to 7.5%. So while the company increased its net income, it has done so with diminishing profit margins. Related Terms:
After-Tax Profit Margin
Berry Ratio
Du Pont Identity
Gross Margin
Net Income
Net Interest Margin
Operating Margin
Profitability Ratios
Revenue
Standalone Profit |