Profit Margin Calculator

More about the Profit Margin so you can better use the results provided by this solver.

The Profit Margin is the ratio of net income to sales. This ratio is a profitability measure, and it indicates how many dollars in net income a firm has for each $1 in sales.

The Profit Margin Formula

In order to calculate the Profit Margin, we use the following profit calculation formula:

\[ \text{Profit Margin} = \displaystyle \frac{\text{Net Income}}{\text{Sales}}\]

Other measures of profitability that you may be interested in are the return on assets or return on equity .

Also, the net income is used to compute another related measure, which is the price earnings ratio , which measures the ratio of price per share to earnings per share.

Example of the calculation of the profit margin

Question: Consider the example of a firm that made $1,000,000 in profit and their sales amounted to $9,800,000. Compute the firm's profit margin.

Solution:

This is the information we have been provided with:

Net Income =	\(1000000\)
Sales =	\(9800000\)

The profit margin is computed using the following formula:

\[ \begin{array}{ccl} PM & = & \displaystyle \frac{\text{Net Income}}{\text{Sales}} \\\\ \\\\ & = & \displaystyle \frac{\text{\textdollar}1000000}{\text{\textdollar}9800000} \\\\ \\\\ & = & 0.1 \end{array} \]

Therefore, the profit margin for the given net income of \(\text{\textdollar}1000000\) and sales of \(\text{\textdollar}9800000\) is \(PM = 0.1 = 10.2\%\). This means the company generates \(\text{\textdollar}0.1\) in net income for every $1 in sales.