Profit margin

Profit margin is a measure of profitability. It is calculated by finding the profit as a percentage of the revenue.[1]

$${\displaystyle {\text{Profit Margin}}={100\cdot {\text{Profit}} \over {\text{Revenue}}}={{100\cdot ({\text{Sales}}-{\text{Total Expenses}})} \over {\text{Revenue}}}}$$

There are 3 types of profit margins: gross profit margin, operating profit margin and net profit margin.

• Gross Profit Margin is calculated as gross profit divided by net sales (percentage). Gross Profit is calculated by deducting the cost of goods sold (COGS) from the revenue, that is all the direct costs. This margin compares revenue to variable cost. It is calculated as:
  $${\displaystyle {\text{Gross Profit}}={\text{Revenue}}-({\text{Direct materials}}+{\text{Direct labor}}+{\text{Factory overhead}})}$$

  
  $${\displaystyle {\text{Net Sales}}={\text{Revenue}}-{\text{Cost of Sales Returns}}-{\text{Allowances and Discounts}}}$$

  
  $${\displaystyle {\text{Gross Profit Margin}}={100\cdot {\text{Gross Profit}} \over {\text{Net Sales}}}}$$

  
• Operating Profit Margin includes the cost of goods sold and is the earning before interest and taxes (EBIT) known as operating income divided by revenue. It is calculated as:
  $${\displaystyle {\text{Operating Profit Margin}}={100\cdot {\text{Operating Income}} \over {\text{Revenue}}}}$$

  
• Net profit margin is net profit divided by revenue. Net profit is calculated as revenue minus all expenses from total sales.
  $${\displaystyle {\text{Net Profit Margin}}={100\cdot {\text{Net profit}} \over {\text{Revenue}}}}$$