Profit margin

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Profit margin, net margin, net profit margin or net profit ratio all refer to a measure of profitability. It is calculated by finding the net profit as a percentage of the revenue.[1]

\mathrm{Net\ profit\ Margin} = {\mathrm{Net\ Profit}\over\mathrm{Revenue}}

where Net Profit = Revenue - Cost

Overview[edit]

Profit margin is calculated with selling price (or revenue) taken as base times 100. It is the percentage of selling price that turned into profit, where as "Profit Percentage" or "Markup" is the percentage of cost price that one gets as profit on top of cost price. While selling something one should know what percentage of profit one will get on a particular investment, so companies calculate profit percentage to find the ratio of profit to cost.

The profit margin is mostly used for internal comparison. It is difficult to accurately compare the net profit ratio for different entities. Individual businesses' operating and financing arrangements vary so much that different entities are bound to have different levels of expenditure, so that comparison of one with another can have little meaning. A low profit margin indicates a low margin of safety: higher risk that a decline in sales will erase profits and result in a net loss, or a negative margin.

Profit margin is an indicator of a company's pricing strategies and how well it controls costs. Differences in competitive strategy and product mix cause the profit margin to vary among different companies.[2]

Profit percentage[edit]

On the other hand, profit percentage is calculated with cost price taken as base

\mathrm{Profit\ percentage} = {\mathrm{Net\ Profit}\over\mathrm{Cost price}}

Suppose you buy something for $100 and sell it off for $150.

cost price = $100
selling price (revenue) = $150
profit = $150 - $100 = $50
profit percentage = $50/$100 = 50% (profit as percentage of cost price)
profit margin = $50/$150 = 33.33% (profit as percentage of selling price or revenue)

See also[edit]

References[edit]

  1. ^ "profit margin Definition". Investor Words. InvestorGuide.com. Retrieved December 17, 2009. 
  2. ^ "profit margin". The Free Dictionary. Farlex. Retrieved December 17, 2009.