Profit margin is a financial ratio that measures the percentage of profit earned by a company in relation to its revenue. It is a common measure of the degree to which a company or a particular business activity makes money. Expressed as a percentage, it represents the portion of a company’s sales revenue that it gets to keep as a profit, after subtracting all of its costs. There are three main types of profit margins:

• Gross Profit Margin: This is the percentage of revenue that remains after deducting the cost of goods sold (COGS) . It is a better way to understand the profitability of specific items rather than an entire business.

• Operating Profit Margin: This is the percentage of revenue that remains after deducting COGS and operating expenses. It accounts for operating costs, administrative costs, and sales expenses.

• Net Profit Margin: This is the percentage of revenue that remains after deducting all expenses, including interest and taxes. It is the most comprehensive type of profit margin and gives the most insight into a companys bottom line.

Profit margins are important indicators of a companys pricing strategies and how well it controls costs. They are used to determine how well a company’s management is generating profits and are helpful to compare over multiple periods and with companies within the same industry. A high profit margin is preferred to attract investors while comparing with similar companies. A good profit margin varies by industry, but the average net profit margin across different industries is 7.71% .