# ✅ Profit Margin Formula ⭐️⭐️⭐️⭐️⭐

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## How to calculate profit margin

1. Find out your COGS (cost of goods sold). For example `\$30`.
2. Find out your revenue (how much you sell these goods for, for example `\$50`).
3. Calculate the gross profit by subtracting the cost from the revenue. `\$50 - \$30 = \$20`
4. Divide gross profit by revenue: `\$20 / \$50 = 0.4`.
5. Express it as percentages: `0.4 * 100 = 40%`.
6. This is how you calculate profit margin… or simply use our gross margin calculator!

As you can see, margin is a simple percentage calculation, but, as opposed to markup, it’s based on revenue, not on Cost of Goods Sold (COGS).

## Gross margin formula

The formula for gross margin percentage is as follows: `gross_margin = 100 * profit / revenue` (when expressed as a percentage). The profit equation is: `profit = revenue - costs`, so an alternative margin formula is: `margin = 100 * (revenue - costs) / revenue`.

Now that you know how to calculate profit margin, here’s the formula for revenue: `revenue = 100 * profit / margin`.

And finally, to calculate how much you can pay for an item, given your margin and revenue (or profit), do: `costs = revenue - margin * revenue / 100`

## A note on terminology

All the terms (margin, profit margin, gross margin, gross profit margin) are a bit blurry and everyone uses them in slightly different contexts. For example, costs may or may not include expenses other than COGS – usually, they don’t. In this calculator, we are using these terms interchangeably and forgive us if they’re not in line with some definitions. To us, what’s more important is what these terms mean to most people, and for this simple calculation the differences don’t really matter. Luckily, it’s likely that you already know what you need and how to treat this data. This tool will work as gross margin calculator or a profit margin calculator.

So the difference is completely irrelevant for the purpose of our calculations – it doesn’t matter in this case if costs include marketing or transport. Most of the time people come here from Google after having searched for different keywords. In addition to those mentioned before, they searched for profit calculator, profit margin formula, how to calculate profit, gross profit calculator (or just gp calculator) and even sales margin formula.

## Margin vs markup

The difference between gross margin and markup is small but important. The former is the ratio of profit to the sale price and the latter is the ratio of profit to the purchase price (Cost of Goods Sold). In layman’s terms, profit is also known as either markup or margin when we’re dealing with raw numbers, not percentages. It’s interesting how some people prefer to calculate the markup, while others think in terms of gross margin. It seems to us that markup is more intuitive, but judging by the number of people who search for markup calculator and margin calculator, the latter is a few times more popular.

## FAQ

### What’s the difference between gross and net profit margin?

Gross profit margin is your profit divided by revenue (the raw amount of money made). Net profit margin is profit minus the price of all other expenses (rent, wages, taxes etc) divided by revenue. Think of it as the money that ends up in your pocket. While gross profit margin is a useful measure, investors are more likely to look at your net profit margin, as it shows whether operating costs are being covered.

### Can profit margin be too high?

While a common sense approach to economics would be to maximise revenue, it should not be spent idly – reinvest most of this money to promote growth. Pocket as little as possible, or your business will suffer in the long term! There are also certain practices that, despite short term profit, will cost you more money in the long run, e.g., importing resources from a country likely to be subject to economic sanctions in the future, or buying a property that will be underwater in 5 years.

### What is margin in sales?

Your sales margin is the product of the selling price an item or service, minus the expenses it took to get the product to be sold, expressed as a percentage. These expenses include: discounts, material and manufacturing costs, employee salaries, rent, etc. While this is very similar to net profit, sales margin is in per unit terms.

### How do I calculate a 20% profit margin?

1. Express 20% in its decimal form, 0.2.
2. Subtract 0.2 from 1 to get 0.8.
3. Divide the original price of your good by 0.8.
4. There you go, this new number is how much you should charge for a 20% profit margin.

### What is a good margin?

There is no definite answer to “what is a good margin” – the answer you will get will vary depending on whom you ask, and your type of business. Firstly, you should never have a negative gross or net profit margin, otherwise you are losing money. Generally, a 5% net margin is poor, 10% is okay, while 20% is considered a good margin. There is no set good margin for a new business, so check your respective industry for an idea of representative margins, but be prepared for your margin to be lower. For small businesses, employees are often your main expense.

### How do I calculate margin in Excel?

While it’s easier to use the Omni Margin Calculator, it is useful to know how to calculate margin in Excel:

1. Input the cost of goods sold (for example, into cell A1).
2. Input your revenue on the product (for example, into cell B1).
3. Calculate profit by subtracting cost from revenue (In C1, input =B1-A1) and label it “profit”.
4. Divide profit by revenue and multiply it by 100 (In D1, input =(C1/B1)*100) and label it “margin”.
5. Right click on the final cell and select Format Cells.
6. In the Format Cells box, under Number, select Percentage and specify your desired number of decimal places.

### How do I calculate a 10% margin?

1. Make 10% a decimal by dividing 10 by 100 to get 0.1.
2. Take 0.1 away from 1, equalling 0.9.
3. Divide how much your item cost you by 0.9.
4. Use this new number as your sale price if you want a 10% profit margin.

### Are margin and profit the same?

Although both measure the performance of a business, margin and profit are not the same. All margin metrics are given in percent values, and therefore deal with relative change, good for comparing things that are operating on a completely different scale. Profit is explicitly in currency terms, and so provides a more absolute context – good for comparing day to day operations.

### How do I calculate a 30% margin?

1. Turn 30% into a decimal by dividing 30 by 100, which is 0.3.
2. Minus 0.3 from 1 to get 0.7.
3. Divide the price the good cost you by 0.7.
4. The number that you receive is how much you need to sell the item for to get a 30% profit margin.

### How do I calculate markup from margin?

1. Turn your margin into a decimal by dividing the percentage by 100.
2. Subtract this decimal from 1.
3. Divide 1 by the product of the subtraction.
4. Subtract 1 from product of the previous step.
5. You now have markup expressed in decimal form!
6. If you want to have markup in percentage form, multiply the decimal by 100.

## What Is the Formula for Calculating Profit Margins?

Profit margins are perhaps one of the simplest and most widely used financial ratios in corporate finance. A company’s profit is calculated at three levels on its income statement, starting with the most basic—gross profit—and building up to the most comprehensive: net profit. Between these two lies operating profit. All three have corresponding profit margins calculated by dividing the profit figure by revenue and multiplying by 100.

Key Takeaways

• Profit margin conveys the relative profitability of a firm or business activity by accounting for the costs involved in producing and selling goods.
• Margins can be computed from gross profit, operating profit, or net profit.
• The greater the profit margin, the better, but a high gross margin along with a small net margin may indicate something that needs further investigation.

## Gross Profit Margin

Gross profit is the simplest profitability metric because it defines profit as all income that remains after accounting for the cost of goods sold (COGS). COGS includes only those expenses directly associated with the production or manufacture of items for sale, including raw materials and the wages for labor required to make or assemble goods.

Excluded from this figure are, among other things, any expenses for debt, taxes, operating, or overhead costs, and one-time expenditures such as equipment purchases. The gross profit margin compares gross profit to total revenue, reflecting the percentage of each revenue dollar that is retained as profit after paying for the cost of production.

The formula for gross profit margin is:

## Operating Profit Margin

Operating profit is a slightly more complex metric, also taking into account all overhead, operating, administrative, and sales expenses necessary to run the business on a day-to-day basis. While this figure still excludes debts, taxes, and other nonoperational expenses, it does include the amortization and depreciation of assets. By dividing operating profit by revenue, this mid-level profitability margin reflects the percentage of each dollar that remains after payment for all expenses necessary to keep the business running.

The formula for operating profit margin is:

## Net Profit Margin

The infamous bottom line, net income, reflects the total amount of revenue left over after all expenses and additional income streams are accounted for. This includes not only COGS and operational expenses as referenced above but also payments on debts, taxes, one-time expenses or payments, and any income from investments or secondary operations. The net profit margin reflects a company’s overall ability to turn income into profit.

The formulas for net profit margin are either:

## Example of Profit Margin

For the fiscal year ended Oct. 3, 2021, Starbucks Corp. (SBUX) recorded revenue of \$29.06 billion. Gross profit and operating profit clock in at \$20.32 billion and \$4.87 billion, respectively. The net profit for the year is \$4.2 billion.1 The profit margins for Starbucks would therefore be calculated as:

• Gross profit margin = (\$20.32 billion ÷ \$29.06 billion) × 100 = 69.92%
• Operating profit margin = (\$4.87 billion ÷ \$29.06 billion) × 100 = 16.76%
• Net profit margin = (\$4.2 billion ÷ \$29.06 billion) × 100 = 14.45%

This example illustrates the importance of having strong gross and operating profit margins. Weakness at these levels indicates that money is being lost on basic operations, leaving little revenue for debt repayments and taxes. The healthy gross and operating profit margins in the above example enabled Starbucks to maintain decent profits while still meeting all of its other financial obligations.

## What Is a Good Net Profit Margin?

A good net profit margin varies widely among industries. According to a New York University analysis of industries in January 2022, the averages range from nearly 29% for railroad transportation to almost -20% for renewable and green energy. The average net profit margin for general retail sits at 2.65% and restaurants are 12.63%.

So a good net profit margin to aim for as a business owner or manager is highly dependent on your specific industry. It’s important to keep an eye on your competitors and compare your net profit margins accordingly. Additionally, it’s important to review your own business’s year-to-year profit margins to ensure that you are on solid financial footing.

## Which Profit Margin Formula is the Most Useful?

The most significant profit margin is likely the net profit margin, simply because it uses net income. The company’s bottom line is important for investors, creditors, and business decision-makers alike. This is the figure that is most likely to be reported in a company’s financial statements.

However, each formula has its own value for internal analysis. The gross profit margin can be used by management on a per-unit or per-product basis to identify successful vs. unsuccessful product lines. The operating profit margin is useful to identify the percentage of funds left over to pay the Internal Revenue Service (IRS) and the company’s debt and equity holders.

## Are There Other Profit Margin Formulas?

Yes. An adjusted gross margin is also useful for internal analysis. It is similar to gross profit margin, but it includes the carrying cost of inventory. Two companies with similar gross profit margins could have drastically different adjusted gross margins depending on the expenses that they incur to transport, insure, and store inventory.

Profit margin can also be calculated on an after-tax basis, but before any debt payments are made. This is referred to as an after-tax unadjusted margin. It more directly identifies the funds left over to pay lenders.

## What Is Profit Margin?

Profit margin is one of the commonly used profitability ratios to gauge the degree to which a company or a business activity makes money. It represents what percentage of sales has turned into profits. Simply put, the percentage figure indicates how many cents of profit the business has generated for each dollar of sale. For instance, if a business reports that it achieved a 35% profit margin during the last quarter, it means that it had a net income of \$0.35 for each dollar of sales generated.

There are several types of profit margin. In everyday use, however, it usually refers to net profit margin, a company’s bottom line after all other expenses, including taxes and one-off oddities, have been taken out of revenue.

### Key takeways

• Profit margin gauges the degree to which a company or a business activity makes money, essentially by dividing income by revenues.
• Expressed as a percentage, profit margin indicates how many cents of profit has been generated for each dollar of sale.
• While there are several types of profit margin, the most significant and commonly used is net profit margin, a company’s bottom line after all other expenses, including taxes and one-off oddities, have been removed from revenue.
• Profit margins are used by creditors, investors, and businesses themselves as indicators of a company’s financial health, management’s skill, and growth potential.
• As typical profit margins vary by industry sector, care should be taken when comparing the figures for different businesses

## The Basics of Profit Margin

Businesses and individuals across the globe perform for-profit economic activities with an aim to generate profits. However, absolute numbers—like \$X million worth of gross sales, \$Y thousand business expenses, or \$Z earnings—fail to provide a clear and realistic picture of a business’ profitability and performance. Several different quantitative measures are used to compute the gains (or losses) a business generates, which makes it easier to assess the performance of a business over different time periods or compare it against competitors. These measures are called profit margin.

While proprietary businesses, like local shops, may compute profit margins at their own desired frequency (like weekly or fortnightly), large businesses including listed companies are required to report it in accordance with the standard reporting timeframes (like quarterly or annually). Businesses that may be running on loaned money may be required to compute and report it to the lender (like a bank) on a monthly basis as a part of standard procedures.

There are four levels of profit or profit margins: gross profit, operating profit, pre-tax profit, and net profit. These are reflected on a company’s income statement in the following sequence: A company takes in sales revenue, then pays direct costs of the product of service. What’s left is gross margin. Then it pays indirect costs like company headquarters, advertising, and R&D. What’s left is operating margin. Then it pays interest on debt and adds or subtracts any unusual charges or inflows unrelated to the company’s main business with pre-tax margin left over. Then it pays taxes, leaving the net margin, also known as net income, which is the very bottom line.

### Gross Profit Margin

Gross profit margin: Start with sales and take out costs directly related to creating or providing the product or service like raw materials, labor, and so on—typically bundled as “cost of goods sold,” “cost of products sold,” or “cost of sales” on the income statement—and you get gross margin. Done on a per-product basis, gross margin is most useful for a company analyzing its product suite (though this data isn’t shared with the public), but aggregate gross margin does show a company’s rawest profitability picture. As a formula:

### Operating Profit Margin

Operating Profit Margin (or just operating margin): By subtracting selling, general and administrative, or operating expenses, from a company’s gross profit number, we get operating profit margin, also known as earnings before interest and taxes, or EBIT. Resulting in an income figure that’s available to pay the business’ debt and equity holders, as well as the tax department, it’s profit from a company’s main, ongoing operations. it’s frequently used by bankers and analysts to value an entire company for potential buyouts. As a formula:

### Pretax Profit Margin

Pretax profit margin: Take operating income and subtract interest expense while adding any interest income, adjust for non-recurring items like gains or losses from discontinued operations, and you’ve got pre-tax profit, or earnings before taxes (EBT); then divide by revenue, and you’ve got the pretax profit margin.

The major profit margins all compare some level of residual (leftover) profit to sales. For instance, a 42% gross margin means that for every \$100 in revenue, the company pays \$58 in costs directly connected to producing the product or service, leaving \$42 as gross profit.

## Net Profit Margin

Let’s now consider net profit margin, the most significant of all the measures—and what people usually mean when they ask, “what’s the company’s profit margin?”

Net profit margin is calculated by dividing the net profits by net sales, or by dividing the net income by revenue realized over a given time period. In the context of profit margin calculations, net profit and net income are used interchangeably. Similarly, sales and revenue are used interchangeably. Net profit is determined by subtracting all the associated expenses, including costs towards raw material, labor, operations, rentals, interest payments, and taxes, from the total revenue generated.

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

= (Net Sales – Expenses) / Net Sales

= 1- (Expenses / Net Sales)

Dividends paid out are not considered an expense, and are not considered in the formula.

Taking a simple example, if a business realized net sales worth \$100,000 in the previous quarter and spent a total of \$80,000 towards various expenses, then

Profit Margin    = 1 – (\$80,000 / \$100,000)

= 1- 0.8

= 0.2 or 20%

It indicates that over the quarter, the business managed to generate profits worth 20 cents for every dollar worth of sales. Let’s consider this example as the base case for future comparisons that follow.

## Analyzing the Profit Margin Formula

A closer look at the formula indicates that profit margin is derived from two numbers—sales and expenses. To maximize the profit margin, which is calculated as {1 – (Expenses/ Net Sales)}, one would look to minimize the result achieved from the division of (Expenses/Net Sales). That can be achieved when Expenses are low and Net Sales are high.

Let’s understand it by expanding the above base case example.

If the same business generates the same amount of sales worth \$100,000 by spending only \$50,000, its profit margin would come to {1 – \$50,000/\$100,000)} = 50%. If the costs for generating the same sales further reduces to \$25,000, the profit margin shoots up to {1 – \$25,000/\$100,000)} = 75%. In summary, reducing costs helps improve the profit margin.

On the other hand, if the expenses are kept fixed at \$80,000 and sales improve to \$160,000, profit margin rises to {1 – \$80,000/\$160,000)} = 50%. Raising the revenue further to \$200,000 with the same expense amount leads to profit margin of {1 – \$80,000/\$200,000)} = 60%. In summary, increasing sales also bumps up the profit margins.

Based on the above scenarios, it can be generalized that the profit margin can be improved by increasing sales and reducing costs. Theoretically, higher sales can be achieved by either increasing the prices or increasing the volume of units sold or both. Practically, a price rise is possible only to the extent of not losing the competitive edge in the marketplace, while sales volumes remain dependent on market dynamics like overall demand, percentage of market share commanded by the business, and competitors’ existing position and future moves. Similarly, the scope for cost controls is also limited. One may reduce/eliminate a non-profitable product line to curtail expenses, but the business will also lose out on the corresponding sales.

In all scenarios, it becomes a fine balancing act for the business operators to adjust pricing, volume, and cost controls. Essentially, profit margin acts as an indicator of business owners’ or management’s adeptness in implementing pricing strategies that lead to higher sales and efficiently controlling the various costs to keep them minimal.

## Using Profit Margin

From a billion-dollar publicly listed company to an average Joe’s sidewalk hot dog stand, the profit margin figure is widely used and quoted by all kinds of businesses across the globe. Beyond individual businesses, it is also used to indicate the profitability potential of larger sectors and of overall national or regional markets. It is common to see headlines like “ABC Research warns on declining profit margins of American auto sector,” or “European corporate profit margins are breaking out.”

In essence, the profit margin has become the globally adopted standard measure of the profit-generating capacity of a business and is a top-level indicator of its potential. It is one of the first few key figures to be quoted in the quarterly results reports that companies issue.

Internally, business owners, company management, and external consultants use it for addressing operational issues and to study seasonal patterns and corporate performance during different timeframes. A zero or negative profit margin translates to a business either struggling to manage its expenses or failing to achieve good sales. A further drill-down helps identify the leaking areas—like high unsold inventory, excess yet underutilized employees and resources, or high rentals—and then devise appropriate action plans. Enterprises operating multiple business divisions, product lines, stores, or geographically spread-out facilities may use profit margin for assessing the performance of each unit and compare it against one another.

Profit margins often come into play when a company seeks funding. Individual businesses, like a local retail store, may need to provide it for seeking (or restructuring) a loan from banks and other lenders. It also becomes important while taking out a loan against a business as collateral. Large corporations issuing debt to raise money are required to reveal their intended use of collected capital, and that provides insights to investors about profit margin that can be achieved either by cost cutting or by increasing sales or a combination of both. The number has become an integral part of equity valuations in the primary market for initial public offerings (IPO).

Finally, profit margins are a significant consideration for investors. Investors looking at funding a particular startup may like to assess the profit margin of the potential product/service being developed. While comparing two or more ventures or stocks to identify the better one, investors often hone in on the respective profit margins.

## Comparing Profit Margins

However, profit margin cannot be the sole decider for comparison as each business has its own distinct operations. Usually, all businesses with low profit margins, like retail and transportation, will have high turnaround and revenue which makes up for overall high profits despite the relatively low profit margin figure. High-end luxury goods have low sales, but high profits per unit make up for high profit margins. Below is a comparison between the profit margins of four long-running and successful companies from the technology and retail space:

Technology companies like Microsoft and Alphabet have high double-digit quarterly profit margins compared to the single-digit margins achieved by Walmart and Target. However, it does not mean Walmart and Target did not generate profits or were less successful businesses compared to Microsoft and Alphabet.

A look at stock returns between 2006 and 2012 indicate similar performances across the four stocks, though Microsoft and Alphabet’s profit margin were way ahead of Walmart and Target’s during that period. Since they belong to different sectors, a blind comparison solely on profit margins may be inappropriate. Profit margin comparisons between Microsoft and Alphabet, and between Walmart and Target is more appropriate.

## Examples of High Profit Margin Industries

Businesses of luxury goods and high-end accessories often operate on high profit potential and low sales. Few costly items, like a high-end car, are ordered to build—that is, the unit is manufactured after securing the order from the customer, making it a low-expense process without much operational overheads.

Software or gaming companies may invest initially while developing a particular software/game and cash in big later by simply selling millions of copies with very little expenses. Getting into strategic agreements with device manufacturers, like offering pre-installed Windows and MS Office on Dell-manufactured laptops, further reduces the costs while maintaining revenues.

Patent-secured businesses like pharmaceuticals may incur high research costs initially, but they reap big with high profit margins while selling the patent-protected drugs with no competition.

## Examples of Low Profit Margin Industries

Operation-intensive businesses like transportation which may have to deal with fluctuating fuel prices, drivers’ perks and retention, and vehicle maintenance usually have lower profit margins.

Agriculture-based ventures usually have low profit margins owing to weather uncertainty, high inventory, operational overheads, need for farming and storage space, and resource-intensive activities.

Automobiles also have low profit margins, as profits and sales are limited by intense competition, uncertain consumer demand, and high operational expenses involved in developing dealership networks and logistics.

## What is a Profit Margin?

In accounting and finance, a profit margin is a measure of a company’s earnings (or profits) relative to its revenue. The three main profit margin metrics are gross profit margin (total revenue minus cost of goods sold (COGS) ), operating profit margin (revenue minus COGS and operating expenses), and net profit margin (revenue minus all expenses, including interest and taxes). This guide will cover formulas and examples, and even provide an Excel template you can use to calculate the numbers on your own.

### Profit Margin Formula

When assessing the profitability of a company, there are three primary margin ratios to consider: gross, operating, and net. Below is a breakdown of each profit margin formula.

Gross Profit Margin = Gross Profit / Revenue x 100

Operating Profit Margin = Operating Profit / Revenue x 100

Net Profit Margin = Net Income / Revenue x 100

As you can see in the above example, the difference between gross vs net is quite large. In 2018, the gross margin is 62%, the sum of \$50,907 divided by \$82,108. The net margin, by contrast, is only 14.8%, the sum of \$12,124 of net income divided by \$82,108 in revenue.

### Profit Margin Example

Let’s consider an example and use the formulas displayed above. XYZ Company is in the online retail business and sells custom printed t-shirts. The revenue from selling shirts in 2018 is \$700k, the cost of goods sold (the direct cost of producing the shirts) is \$200k, and all other operating expenses (such as selling, general, administrative (SG&A), interest and taxes) are \$400k. Calculate the gross and net profit margins for XYZ Company in 2018.

Income Statement:

\$700,000 revenue

(\$200,000) cost of goods sold

\$500,000 gross profit

(\$400,000) other expenses

\$100,000 net income

Based on the above income statement figures, the answers are:

Gross margin is equal to \$500k of gross profit divided by \$700k of revenue, which equals 71.4%.

Net margin is \$100k of net income divided by \$700k of revenue, which equals 14.3%.

### What is a Good Profit Margin?

You may be asking yourself, “what is a good profit margin?” A good margin will vary considerably by industry, but as a general rule of thumb, a 10% net profit margin is considered average, a 20% margin is considered high (or “good”), and a 5% margin is low. Again, these guidelines vary widely by industry and company size, and can be impacted by a variety of other factors.

### Profit Margin Formula Excel (and Calculator)

Below is a screenshot of CFI’s profit margin Excel calculator. As you can see from the image, the Excel file allows you to input various assumptions over a five year period. All cells with blue font and light grey shading can be used to enter your own numbers.  All cells with black font are formulas and don’t need to be edited.

As you can see from the screenshot, if you enter a company’s revenue, cost of goods sold, and other operating expenses you will automatically get margins for Gross Profit, EBITDA, and Net Profit. EBIT (earnings before interest and taxes) is the same thing as Operating Profit; EBITDA is slightly more refined, closer to Net Profit.

To edit the Excel calculator, you can insert or delete rows as necessary, based on the information you have. For example, to add more expense line items such as “Salaries and Wages”, simply insert a row for each one and add the numbers as appropriate.

### Example of profit margin calculations

Let’s say your business makes \$20,000 by cleaning offices. It costs you \$8000 to provide those services, so your gross profit is \$12,000. You spend another \$3000 on operating expenses and \$4000 on taxes, so your net profit is \$5000.

Here’s how to work out your margins.

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