Profit margin

Profit margin

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]

Net profit Margin = (Net Income / Revenue) x100

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]

Confusion

Profit margin is frequently confused with markup. It's not uncommon for entrepreneurs to erroneously claim profit margins over 100%. Most likely these entrepreneurs are referring to the markup on a product as a percentage of product cost.[citation needed]

See also

References

  1. ^ "profit margin Definition". InvestorWords. InvestorGuide.com. http://www.investorwords.com/3885/profit_margin.html. Retrieved December 17, 2009. 
  2. ^ "profit margin". The Free Dictionary. Farlex. http://financial-dictionary.thefreedictionary.com/profit+margin. Retrieved December 17, 2009. 

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