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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.

$\mathrm{N}\mathrm{e}\mathrm{t}\mathrm{p}\mathrm{r}\mathrm{o}\mathrm{f}\mathrm{i}\mathrm{t}\mathrm{M}\mathrm{a}\mathrm{r}\mathrm{g}\mathrm{i}\mathrm{n}=\frac{\mathrm{N}\mathrm{e}\mathrm{t}\mathrm{P}\mathrm{r}\mathrm{o}\mathrm{f}\mathrm{i}\mathrm{t}}{\mathrm{R}\mathrm{e}\mathrm{v}\mathrm{e}\mathrm{n}\mathrm{u}\mathrm{e}}$

where Net Profit = Revenue - Cost

Profit margin is calculated with selling price (or revenue) taken as base times 100. Profit margin 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. So while selling something one should know what percentage of profit will he get on a particular investment so companies calculate profit percentage to check what is ratio of profit on the basis of cost. The profit margin is mostly used for internal comparison.

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

$\mathrm{P}\mathrm{r}\mathrm{o}\mathrm{f}\mathrm{i}\mathrm{t}\mathrm{p}\mathrm{e}\mathrm{r}\mathrm{c}\mathrm{e}\mathrm{n}\mathrm{t}\mathrm{a}\mathrm{g}\mathrm{e}=\frac{\mathrm{N}\mathrm{e}\mathrm{t}\mathrm{P}\mathrm{r}\mathrm{o}\mathrm{f}\mathrm{i}\mathrm{t}}{\mathrm{C}\mathrm{o}\mathrm{s}\mathrm{t}\mathrm{p}\mathrm{r}\mathrm{i}\mathrm{c}\mathrm{e}}$

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)

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.

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.Potter or Ceramic Artist Truman Bedell from Rexton, has interests which include ceramics, best property developers in singapore developers in singapore and scrabble. Was especially enthused after visiting Alejandro de Humboldt National Park. times the amount of equity plus assets. It times the amount of equity plus assets.

See also

• EBIT
• EBITDA
• Gross profit margin
• Net Income

References

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