Profit margin is a financial metric that indicates the percentage of revenue a company retains as profit after covering its costs. It indicates how efficiently a business is operating and how much of its income is retained rather than spent.

A higher profit margin typically means a business is more efficient and financially healthy.

There are different types of profit margins depending on what costs are included:

• Gross profit margin = (Gross profit ÷ Revenue) × 100
  Measures profitability after subtracting the cost of goods sold (COGS).
• Operating profit margin = (Operating profit ÷ Revenue) × 100
  Takes into account operating expenses, such as salaries, rent, and utilities.
• Net profit margin = (Net profit ÷ Revenue) × 100
  Shows the percentage of total revenue that turns into actual profit after all expenses (including taxes and interest) are deducted.

Example (Net profit margin):

If a company earns $200,000 in revenue and $160,000 in total expenses, its net profit is $40,000.

Net profit margin = ($40,000 ÷ $200,000) × 100 = 20%