What is the formula for profit margin?

The formula for profit margin is expressed as the ratio of profit to sales. This means that profit margin is calculated by taking the net profit (which is the revenue minus costs) and dividing it by the total sales revenue. The resulting number is often multiplied by 100 to convert it into a percentage, which helps in understanding the profitability of the business in relation to its sales.

This formula effectively highlights how much of each dollar in sales is converted into profit, giving a clear picture of the company's profitability. A higher profit margin indicates a more profitable company that retains more per dollar of sales, while a lower profit margin could suggest higher costs or pricing issues, despite potentially high sales volumes.

Understanding this formula is crucial for financial analysis and performance evaluation, allowing stakeholders to gauge operational efficiency and profitability.