Profit margin
Profit margin is the share of every rupee of sales that a company keeps as profit. It is worked out by dividing profit by sales. The number only becomes real evidence once you place it beside companies in the same sector.
The formula
Profit margin = Profit ÷ Revenue x 100, shown as a percentage. A 6 percent margin means the company keeps ₹6 of every ₹100 it sells. The profit used can be net profit, which gives the net profit margin, or another measure such as operating profit.
Each sector has its own shape
A business that moves huge volumes of goods through many hands, like a retailer, usually keeps only a few rupees of profit for every ₹100 of sales. A business that sells the same service to thousands of customers at little extra cost, like many technology firms, can keep far more of every rupee earned. Neither shape is better on its own: they are different games played under different rules.
Compare like with like
Comparing two companies' margins without knowing their sectors tells you almost nothing. Checking a company against others in its own line of business is called a peer comparison. Before you call a margin impressive or worrying, name the sector first, then ask what range looks ordinary for it.
What margin does not show
A margin says nothing about how much profit there is in rupees, how fast sales are growing, or how much debt the company carries. Read it with other ratios, such as return on equity and the debt to equity ratio.
A margin against its peers (hypothetical numbers)
A listed cement maker reports that it kept ₹12 of every ₹200 of sales, a margin of 6 percent. Four other listed cement makers report margins between ₹10 and ₹14 of every ₹200 that quarter, which is 5 to 7 percent. Placed against those peers, the cement maker's margin looks ordinary for its sector, not weak on its own.
Common questions
- What is profit margin in simple words?
- The share of every rupee of sales that a company keeps as profit.
- What is a good profit margin?
- It depends on the sector. A margin that is normal for a retailer would be low for a software firm, so compare with peers.
- What is the difference between gross, operating and net margin?
- They use different profit measures: gross is before most costs, operating is after running costs, and net is what is left after everything. Net profit margin is the most common.
- Does a high margin mean a better company?
- Not by itself. Margin ignores growth, debt and how big the profit is in rupees.