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Dictionary / How companies make money

What Is Profit Margin?

Profit margin shows how many cents of profit a company keeps from each dollar of sales. A 20% margin means it keeps 20 cents of every dollar.

How to calculate profit margin

Divide profit by revenue, then multiply by 100. A shop with $100,000 in sales and $20,000 in profit has a 20% profit margin.

ProfitΓ·RevenueΓ—100=Margin %

What does a 20% or 50% margin mean?

At 20%, the company keeps $20 of every $100 it sells. At 50%, it keeps half. Higher margins usually mean the company has pricing power: customers keep buying even when prices rise.

Why margins differ by industry

Supermarkets often keep only a few percent, because they compete hard on price. Software and payment companies can keep far more, because selling one more copy costs almost nothing. Compare margins within the same industry.

Gross, operating and net margin

Each margin uses a different kind of profit. Gross margin only takes out the direct cost of goods. Net margin takes out everything. When people just say "profit margin", they usually mean net margin.

See it in real companies

Open a company to see what it sells and how it makes money.

Related terms

ProfitWhat is left after all costs. RevenueAll the money a company takes in from sales. Revenue vs profitMoney coming in versus money left over. EBITDAProfit before some costs, often used to compare companies. Free cash flowReal cash left after running and growing the business. Price-to-salesPrice compared with revenue, not profit.

See all terms β†’