Profitability ratios - Profit Margin

Profit margin, Net margin, Net profit margin or Net profit ratio all refer to a measure of profitability. Profit margin is an indicator of a company's pricing strategies and how well it controls costs. Differences in competitive strategy and product mix cause the profit margin to vary among different companies.

Profit Margin = Net Profit (after tax) / Sales

Note :- A higher profit margin indicates a more profitable company that has better control over its costs compared to its competitors. A low profit margin indicates a low margin of safety: higher risk that a decline in sales will erase profits and result in a net loss. It measures how much out of every rupee of sales a company actually keeps in earnings.

Illustration :-

This is the 2nd Quarter & Six Months Results ended 30 September 2010 of "ACKRUTI CITY LIMITED".

From this Result we have relevant information to calculate Profit Margin :-


Net Profit (after Tax) for Six Months ended 30.09.2010 = Rs. 7,174 lac
Sales for Six Months ended 30.09.2010 = Rs. 20,687 lac
So, Profit Margin = Net profit (after Tax) / Sales
Profit Margin = 7174 / 20687 = 0.35


Analysis :-


So, Profit Margin is 0.35 means Company has a Net Income Rs. 0.35 paise of each rupee Sales for Six Months Results ended 30.09.2010.