Profit Margin

The Profit Margin (or Net Margin) is a financial ratio that provides information about a company’s profitability. These profitability measures give an indication of how efficiently a company uses its assets and manages its operations. The profit margin equation is: Net income (profit) divided by sales (revenues). All other things being equal, a relatively high profit margin is usually desirable, since it corresponds to low expense ratios relative to sales. However, lowering prices – and thus lowering profit margins – can increase unit volume, since more customers might be tempted to purchase the products. This does not only increase market share, but could also lead to economies of scale. Therefore, the fact that proft margins are smaller isn’t necessarily bad.