# Profit Margin - Explained

What is Profit Margin?

# What is Profit Margin?

In Mathematical terms:

Profit Margin = Net Profits (or Income) / Net Sales (or Revenue)

Profit Margin = (Net Sales - Expenses) / Net Sales

Profit Margin = 1- (Expenses / Net Sales)

Profit margin is used to show the profitability capability of bigger sectors as well as national/regional markets. In short, profit margin is a globally adopted measure for profit generating ability of the business, which also indicates its future potential for the same.

Back to: Accounting & Taxation

# Example of Calculating Profit Margin

Consider a simple example, if a business acquired net sales worth \$100,000 in the last quarter and incurred \$80,000 towards expenses, then Profit Margin = 1 - (\$80,000 / \$100,000) = 1- 0.8 = 0.2 or 20% It shows that in the quarter, the business generated the profits worth 20 cents per each dollar worth of sale. This example is the base case for our future comparisons in this article.

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