Profit margin is the share of revenue a business keeps as profit at a specified point on its income statement. Calculate it by dividing a clearly identified profit figure—such as gross profit, operating income, EBITDA, or net income—by revenue for the same period, then multiplying by 100. The result is a percentage, and its meaning depends on which profit measure you use.
How to calculate profit margin
Profit margin (%) = (specified profit measure ÷ revenue) × 100
Use the profit and revenue figures for the same reporting period. State which profit measure is in the numerator; “profit margin” alone can be ambiguous. For company comparisons, use consistently defined figures and check whether revenue means net revenue or sales in the source statements.
Types of profit margin
Gross profit margin
Gross profit margin = (revenue − cost of goods sold) ÷ revenue × 100. It shows the portion left after the direct costs of the goods or services sold, before operating expenses and later deductions.
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Operating profit margin = operating income ÷ revenue × 100. The U.S. Securities and Exchange Commission defines operating income as the amount remaining after operating expenses but before interest and income tax expenses. Its investor guide gives the formula “Operating Margin = Income from Operations / Net Revenues” and says the measure shows “for each dollar of sales, what percentage was profit” (SEC, Beginners’ Guide to Financial Statements).
EBITDA margin
EBITDA margin = EBITDA ÷ revenue × 100. EBITDA excludes interest, taxes, depreciation, and amortization. It is a distinct measure—not operating margin or net margin—and does not, by itself, show cash flow.
Net profit margin
Net profit margin = net income ÷ revenue × 100. It reflects the final income-statement result after expenses, including interest and taxes. A one-time gain or expense can affect it. In general financial education, “profit margin” often refers to net margin, but company disclosures and analysts may use other named margins; use the specific type whenever known.
Worked example: why the type matters
Corporate Finance Institute (CFI) illustrates the calculation with an online custom-printed T-shirt retailer in 2018:
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- Revenue: $700,000
- Cost of goods sold: $200,000
- Gross profit: $500,000
- Other expenses: $400,000
- Net income: $100,000
Gross margin is $500,000 ÷ $700,000 = 71.4%. Net margin is $100,000 ÷ $700,000 = 14.3%. The difference comes from the expense layers included: gross margin excludes the other expenses, while net margin reflects them. This is CFI’s educational example, not a current company benchmark (CFI, “Profit Margin”).
What a margin can—and cannot—tell you
A margin is a ratio, not a dollar amount. It indicates how much of each revenue dollar remains at the income-statement level represented by the chosen profit figure. A percentage can make profit comparisons across differently sized businesses more useful than comparing raw profit dollars, but only when the underlying definitions, reporting periods, accounting choices, and business contexts are reasonably comparable.
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Changes over time can point to questions worth investigating, but they do not prove a cause:
- A lower gross margin directs attention first to selling prices and direct costs of sales.
- Operating margin also reflects operating expenses.
- Net margin includes financing and taxes and may move because of one-time items outside core operations.
Margin alone does not establish a company’s cash position, growth, debt burden, or return on invested capital. Use it alongside other relevant measures when assessing the broader financial picture.
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What is a good profit margin?
There is no universal good margin. Typical levels vary by industry, business model, company size, and other factors, so a useful comparison needs relevant peers or the company’s own history. CFI gives a rough net-margin rule of thumb—5% low, 10% average, and 20% high or good—while noting that margins vary widely. Treat those figures as general heuristics, not a current industry benchmark or a rule for judging an individual business (CFI, “Profit Margin”).
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