Profit Margin, or marginal cost, is a company’s net revenue after all expenses are deducted. It is expressed in percentages and calculated using the following formula: Profit Margin = (Total Sales – Total Expenses) / Total Sales. If a company made $500k and was left with $100k after expenses, their Profit margin was 20% ($100k / $500k = 0.20). This percentage can be increased by lowering costs and/or increasing revenues.
Profit Margin is an indicator of profitability, stability, expense management, investability, pricing, and performance vs. competition as long as the comparison is made between companies in the same industry and with similar business models. Seasonality and cyclical sales trends should also be taken into consideration.