What is Profit Margin?

Profit margin is a profitability ratio that expresses a company's profit as a percentage of its revenue, showing how many cents of profit are produced by each franc, euro or dollar of sales.

There are three commonly cited margins: gross margin (after COGS), operating margin (after all operating costs), and net margin (after interest and tax). Each isolates a different layer of the income statement.

Margins reveal pricing power and cost discipline. Two companies with identical revenue can have very different value — the one with a 25% net margin generates five times more profit per franc of sales than one earning 5%.

Formula

Profit Margin = Profit ÷ Revenue

Example

A boutique earning CHF 1m revenue and CHF 80,000 net profit has an 8% net margin; a software firm with the same revenue and CHF 350,000 profit has a 35% net margin.

Related terms

Revenue

Revenue is the total income a business generates from selling goods or services before any costs or expenses are deducted, also called the top line.

Gross Profit

Gross profit is revenue minus the direct cost of producing the goods or services sold, showing how much money a business keeps from each sale before operating expenses.

Operating Profit

Operating profit (or operating income, EBIT) is what a business earns from its core operations after deducting both the direct cost of sales and all operating expenses, but before interest and tax.

Return on Investment (ROI)

Return on investment is a profitability ratio that measures the gain or loss generated by an investment relative to its cost, usually expressed as a percentage of the amount invested.

Frequently asked questions

Which margin matters most?+

Net margin for shareholder return; operating margin for operational quality; gross margin for pricing power.

What is a good profit margin?+

Highly industry-specific. Compare to peers, not absolute benchmarks.

How can a business improve margin?+

Raise prices, cut costs, automate, drop unprofitable products, or shift mix toward higher-margin lines.