Legal Definitions - profit margin

Definition:Profit margin is the percentage of revenue that a company keeps as profit after deducting all the expenses. It is calculated by dividing the net profit by the revenue and multiplying the result by 100.

Example: If a company has a revenue of $100,000 and its expenses are $80,000, then its net profit is $20,000. The profit margin would be calculated as follows:

Profit Margin = (Net Profit / Revenue) x 100

Profit Margin = ($20,000 / $100,000) x 100 = 20%

This means that the company keeps 20% of its revenue as profit after paying all the expenses.

Another Example: A bakery sells cakes for $20 each. The cost of ingredients and labor to make one cake is $10. The bakery sells 100 cakes in a month, which means its revenue is $2,000. The total cost of making 100 cakes is $1,000. Therefore, the net profit is $1,000. The profit margin would be:

Profit Margin = (Net Profit / Revenue) x 100

Profit Margin = ($1,000 / $2,000) x 100 = 50%

This means that the bakery keeps 50% of its revenue as profit after deducting the cost of making the cakes.

The examples illustrate that profit margin is the percentage of revenue that a company keeps as profit after paying all the expenses. It is an important metric for businesses to measure their profitability and financial health.