Profit Margin Definition
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
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 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, 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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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.