1. What is Profit Margin Ratio?

The Profit Margin Ratio measures how much out of every dollar of sales a company actually keeps in earnings. It shows the percentage of revenue that remains after accounting for the costs of goods sold.

2. How Does the Calculator Work?

The calculator uses the profit margin formula:

Where:

• \( \text{Revenue} \) — Total income from sales
• \( \text{Cost} \) — Total costs associated with sales

Explanation: The ratio indicates what percentage of sales has turned into profit. A higher percentage means more profit per dollar of sales.

3. Importance of Profit Margin

Details: Profit margin is a key indicator of financial health, pricing strategy effectiveness, and operational efficiency. It helps compare companies within the same industry.

4. Using the Calculator

Tips: Enter revenue and cost in dollars. Both values must be positive, and revenue must be greater than zero.

5. Frequently Asked Questions (FAQ)

Q1: What's a good profit margin ratio?
A: It varies by industry, but generally 10% is average, 20% is good, and 5% is low. Negative margins indicate losses.

Q2: What's the difference between gross and net profit margin?
A: This calculator shows gross margin. Net margin further subtracts operating expenses, taxes, and interest.

Q3: Can profit margin be greater than 1?
A: No, the ratio ranges from 0 to 1 (0% to 100%). Values above 1 would require negative costs.

Q4: How often should profit margin be calculated?
A: Businesses should track it monthly to monitor financial health and spot trends.

Q5: Why is profit margin important for investors?
A: It shows how efficiently a company converts sales into profits and can indicate competitive advantages.