What Is a Profit Margin?
<iframe width=”560″ height=”315″ src=”https://www.youtube.com/embed/o1BpGB8FWFc” frameborder=”0″ allow=”accelerometer; autoplay; encrypted-media; gyroscope; picture-in-picture” allowfullscreen></iframe><p><i> Video created by <a href=”https://www.financestrategists.com/terms/profit/”>Finance Strategists</a>.</i></p>
Profit Margin Definition
Any profit a company generates goes to its owners, who may choose to distribute the money to shareholders as income, or allocate it back into the business to finance further company growth.
The method of calculating profit is simple: subtract a business’s expenses from its total revenue over a fixed amount of time.
Three Primary Levels of Profit
There are three primary levels of profit of interest to investors: gross profit, operating profit, and net profit.
Gross profit subtracts only the direct cost of producing goods from the total revenue.
Since the cost of producing goods is an inevitable expense, some investors view this as a measure of a company’s overall ability to generate profit.
Operating profit takes into account both the cost of goods sold and operating expenses such as selling, general, and administrative costs (otherwise known as SG&A).
Net profit, or the bottom line, is the money left over after subtracting all expenses from total revenue.
Net profit can refer to earnings before or after tax, so some use “net net” to clarify net profit after taxes.
Investors use all three metrics as a way to evaluate a company’s health, but profit often is in reference to net profit.