Profit margin ratios

The profit margin ratio is a financial metric that indicates the percentage of a company's revenue that is turned into profit. It is calculated by dividing the net income (profit) by the total revenue and multiplying by 100.

There are two types of profit margin ratios commonly used in financial analysis:

1. Gross profit margin: This ratio measures the amount of profit generated from sales after deducting the cost of goods sold. The formula is:
Gross profit margin = (Gross profit / Total revenue) x 100

2. Net profit margin: This ratio reflects the overall profitability of a company after all expenses, including operating expenses, interest, and taxes, have been deducted from revenue. The formula is:
Net profit margin = (Net income / Total revenue) x 100

Both profit margin ratios are important indicators of a company's financial health and efficiency in generating profit. A higher profit margin ratio signifies a more profitable company, while a lower ratio may indicate inefficiencies in the company's operations or financial management.