The profit margin measures the amount of net income earned with each dollar of sales generated by comparing the net income and net sales of a company. The profit margin ratio shows what percentage of sales are left over after all expenses are paid by the business.
The profit margin formula can be calculated by dividing net income by net sales.
Profit Margin = Net Income / Net Sales
Investors track profit margin to determine how effectively a company can convert sales into net income. Investors want to make sure profits are high enough to distribute dividends without crashing the business while creditors want to make sure the company has enough profits to pay back its loans.<< Back to Glossary Index