How is profit margin calculated?

Profit margin is a financial metric that measures how much profit a company makes for each dollar of sales. It is calculated by taking net income, which represents the profit after all expenses have been deducted from total revenue, and dividing it by net sales, which is the total revenue from sales after returns, allowances, and discounts. The formula for profit margin can be expressed as:

Profit Margin = (Net Income / Net Sales) × 100

This calculation provides insight into a company's profitability relative to its sales, helping stakeholders assess efficiency and performance. A higher profit margin indicates a more profitable company or effective cost management.

In contrast to the other calculations presented, net sales divided by net income does not yield profit margin; instead, it would provide a different ratio that does not reflect profitability per se. Total revenue divided by total costs would provide insights into cost efficiency but is not the correct formula for profit margin. Lastly, gross profit divided by expenses does not directly relate to profit margin but rather examines the relationship between gross profit and the expenses incurred, which is a separate analysis from measuring profit margin.