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How to Calculate Profit Margins: Definition and Examples

Woman calculating profit margins

Understanding how to calculate profit margins is a core responsibility of accountants and many other finance professionals. Profit margins are an easy way to determine if a company is profitable and can inform investing decisions and help with crafting budgets. 

In this guide, we’ll go over: 

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What Is a Profit Margin?

A profit margin is a straightforward measure of profitability. It looks at how much the company makes per $1 of revenue generated. Or, to put it another way, a profit margin shows how much revenue a company can keep as profit. Profit margins are typically expressed as percentages. For example, a 60% profit margin would mean a company had a profit of $0.60 for every dollar of revenue generated. 

Profit margins can be negative or positive, and companies with negative profit margins can still survive. Ultimately, companies want to maximize profits, which they can do by either cutting expenses or by increasing revenue. 

Who Needs to Calculate Profit Margins?

Calculating profit margins is a core aspect for many accounting and finance professionals. Even bankers may use profit margins to determine if a company is profitable and worth the investment. Understanding how to calculate profit margins can help certain accountants, like certified management accountants, build budgets because they can see what areas are causing the most loss in profits. 

Profit margins are also useful for investors of any kind — profitable companies may be a less risky investment, and knowing a company’s profit margins can inform investor decisions. 

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Profit Margin Formulas

You can calculate different types of profit margins, including net profit, gross profit, operating profit, and pre-tax profit. Net and gross profit margins are the most commonly used by finance professionals. Gross profit looks at earnings after the cost of goods or services. On the other hand, net profit looks at profits after everything else has also been taken out, like taxes, marketing expenses, rent, and debts. 

How to Calculate Gross Profit Margin

Gross profit is revenue (or net sales) minus the direct cost of goods or services. For example, if a company sells T-shirts, its gross profit would be how much it made from selling the shirts minus how much the company paid for the shirts. The margin is the gross profit divided by the total revenue, which creates a ratio. You can then multiply by 100 to make a percentage. 

The formula for calculating gross profit margins is: 

Gross Profit Margin = ( (Net Sales – COGS) / Revenue ) x 100

In this formula:

  • Net sales can be used interchangeably with revenue for the sake of this formula — it is simply how much money was generated from selling products, goods, or services. 
  • COGS is the cost of goods sold (raw materials, labor, manufacturing expenses).
  • Net sales minus COGS gives you gross profits.
  • Multiply by 100 at the end of the formula to create a percentage. 

How to Calculate Net Profit Margin

Net profit or net income is how much the company makes after all expenses are removed. These expenses include taxes, COGS, debts, operating costs, depreciation, and interest payments. 

For example, the same T-shirt company from before also pays for warehouse space, advertisements, and small business loan payments. So, the net profit would be how much is left over after all of that is covered. To find the net profit margin, you divide the net income by total revenue, creating a ratio. You can then multiply by 100 to make a percentage. 

The formula for calculating net profit margins is:

Net Profit Margin = (Net Profit / Revenue) x 100

In this formula:

  • Net profit is the same as net income: the amount left over after all costs are accounted for. 
  • Revenue is how much money was generated by the company by selling products, goods, or services. 
  • Multiply by 100 to create a percentage.

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Calculating Profit Margins: Examples

Let’s take a look at Apple. Using Apple’s 2022 earnings statement from September, we can figure out its profit margins for 2022. Here are the details we need: 

  • Apple’s total net sales (revenue) for 2022: $394,328 million
  • Apple’s gross profit for 2022: $170,782 million
  • Apple’s net income (profit) for 2022: $99,803 million

To determine the gross profit margin, we need to divide the gross profit by the total revenue for the year and then multiply by 100. 

( $170,782m / $394,328m ) x 100

  • Apple’s gross profit margin for 2022 is: 43.3%

To determine the net profit margin, we need to divide the net income (or net profit) by the total revenue for the year and then multiply by 100. 

( $99,803m / $394,328m ) x 100

  • Apple’s net profit margin for 2022 is: 25.3%

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How to Show Profit Margin Knowledge on Your Resume

Calculating profit margins is only one way to measure profitability. So you should mention on your resume if you have coursework, past work experience, or internships that worked on business valuation or tracking companies’ profitability. In the description of the job or internship, you could mention “calculated profit margins for company worth $X amount” or that you calculated and compared profit margins for companies across various industries. 

You can also talk about your experience with profit margins in your cover letter. For example, if your relative has a small business and you helped them look at their profit margins to find areas where cutting costs would have a big impact, mention that. 

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Since calculating profit margins is only one way to determine a company’s profitability, accountants and finance professionals need to understand other measures of a business’s success. Some core metrics to know include: 

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