Profit Margin Definition

Profit is the money earned by a business when its total revenue exceeds its total expenses. Profit margin is profit stated as a percentage of revenue.

Any profit a company generates goes to its owners, who may choose to distribute the money to shareholders as income or allocate it back into the business to finance further company growth. The method of calculating profit is simple: subtract a business’s expenses from its total revenue over a fixed amount of time.

Three Primary Levels of Profit

There are three primary levels of profit of interest to investors: gross profit, operating profit, and net profit.

Gross Profit

Gross profit subtracts only the direct cost of producing goods from the total revenue. Since the cost of producing goods is an inevitable expense, some investors view this as a measure of a company’s overall ability to generate profit.

Operating Profit

Operating profit takes into account both the cost of goods sold and operating expenses such as selling, general and administrative costs (otherwise known as SG&A).

Net Profit

Net profit, or the bottom line, is the money left over after subtracting all expenses from total revenue. Net profit can refer to earnings before or after tax, so some use “net-net” to clarify net profit after taxes.

Investors use all three metrics as a way to evaluate a company’s health, but profit often is in reference to net profit.

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What Is Profit Margin (FAQs)

Profit margin is any profit a company generates that goes to its owners, who may choose to distribute the money to shareholders as income, or allocate it back into the business to finance further company growth.
The method of calculating profit is simple: subtract a business’s expenses from its total revenue over a fixed amount of time.
There are three primary levels of profit that are of interest to investors: gross profit, operating profit, and net profit.
To find profit margin, divide gross income by a company's revenue then multiply the result by 100 to make it a percentage.
The bottom line with profit margin - for both investors and company officers - is that it expresses to what degree the company is making money.

True Tamplin, BSc, CEPF®

About the Author
True Tamplin, BSc, CEPF®

True Tamplin is a published author, public speaker, CEO of UpDigital, and founder of Finance Strategists.

True is a Certified Educator in Personal Finance (CEPF®), a member of the Society for Advancing Business Editing and Writing, contributes to his financial education site, Finance Strategists, and has spoken to various financial communities such as the CFA Institute, as well as university students like his Alma mater, Biola University, where he received a bachelor of science in business and data analytics.

To learn more about True, visit his personal website, view his author profile on Amazon, or check out his speaker profile on the CFA Institute website.