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Table of Contents
What is Profit Margin?How is Profit Margin Work?Use of Profit MarginExamples of High Profit Margin IndustriesExamples of Low Profit Margin IndustriesConclusionAcademic Research on Profit MarginWhat is Profit Margin?
In Mathematical terms:
Profit Margin = Net Profits (or Income) / Net Sales (or Revenue)
Profit Margin = (Net Sales - Expenses) / Net Sales
Profit Margin = 1- (Expenses / Net Sales)
Profit margin is used to show the profitability capability of bigger sectors as well as national/regional markets. In short, profit margin is a globally adopted measure for profit generating ability of the business, which also indicates its future potential for the same.
Example of Calculating Profit Margin
Consider a simple example, if a business acquired net sales worth $100,000 in the last quarter and incurred $80,000 towards expenses, then Profit Margin = 1 - ($80,000 / $100,000) = 1- 0.8 = 0.2 or 20% It shows that in the quarter, the business generated the profits worth 20 cents per each dollar worth of sale. This example is the base case for our future comparisons in this article.
Related Topics
- Trend Analysis of Financial Statements
- Common-Size Analysis (Vertical Analysis) of Financial Statements
- Common-Size Financial Statement
- Net Dollar Retention
- Horizontal Analysis
- Per Share Basis
- Profitability Ratios
- Gross Margin Ratio
- Profit Margin
- After Tax Profit Margin
- Return on Assets
- Total Shareholder Return
- Cash on Cash Return
- Earnings Per Share
- Diluted Earnings Per Share
- Asset Turnover Ratio
- Berry Ratio
- Break-Even Analysis
- Liquidity Ratio
- Current ratio (Working Capital Ratio)
- Working Ratio
- Quick Ratio
- Quick Assets
- Days Sales Outstanding
- Cash Ratio (Operating Cash Flow Ratio)
- Receivables turnover ratio (often converted to average collection period)
- Accounts Payable Turnover Ratio
- Inventory turnover ratio (often converted to average sale period)
- Solvency (Coverage Ratios)
- Leverage Ratio (Debt Ratio)
- Asset Coverage Ratio
- Debt to Equity
- Debt to Income Ratio
- Debt Coverage Ratio
- Times Interest Earned
- Market Capitalization
- Price to Equity Ratio
- Book-To-Market Ratio
- Price to Earnings Ratio
- Price to Earnings Growth (PEG) Ratio
- Price to Earnings Growth Payback Ratio
- CAPE Ratio
- Price to Cash Flow Ratio
- Capital Maintenance
- Book to Bill Ratio
- Asset Turnover Ratio
- Plowback Ratio
- Days Inventory Outstanding
- Days Payable Outstanding
- Days Sales Outstanding
- Non-financial Performance Measures: The Balance Scorecard