Formula

Profit Margin = Net Profit/Revenue X 100

Description

Profit Margin shows percentage of actual earning over revenue.Revenue is the total income that the company receives from sales before deducting cost of goods sold.Net profit is the actual earning that the company earns after deducting all the cost include cost of goods sold and income tax.Profit margin shows the ability of the company to earn net profit over it sales.High profit margin company is able to obtain higher net profit compared with a company with low profit margin even both companies are earning same amount of revenue.Hence, profit margin is as higher as better.This crtieria can use to monitor the performance of the company's management.For a traditional company that is producing same product all the while, good management should be able to improve its profit margin over a period because they should look for opportunity to reduce cost of good sold to improve company efficiency.

Example

If Company A has total 100,000 revenue and 10,000 net profit for this financial year,
Profit Margin = Net Profit / Revenue X 100 = 10,000 / 100,000 X 100 =10 %
In this case, it shows that for every RM1 this company earn, 10% or 10 sen of its revenue is the net profit.

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