In the business world, “profit margin” is one of the most commonly used ratios. It is the basic measurement of how much a business, product, or service is making. It’s typically expressed as a percentage and is how much the business makes per transaction. As a general rule, the higher the profit margin, the more profitable the business. Therefore, the profit margin is often used to determine the success of a business.

## How to Calculate Profit Margin

There are different types of profit margins, but the equation typically involves two key metrics: business sales versus expenses. Generally, you can calculate profit margin by taking your sales and subtracting your expenses. You can use this metric to calculate profit margin for a certain period of time for certain products/lines. However, it’s important to note that the metric varies more with short time periods.

• Gross
• Net
• Operating Â

## Gross Profit Margin

This is the income remaining after you account for the cost of goods sold, or COGS, which are expenses related to the production/manufacturing of the product. This includes wages, raw materials, and anything else involved. You will not include debt, taxes, overhead costs, or one-time expenditures, such as equipment purchases.

## Net Profit Margin

This is the percentage of profit produced from total revenue. It is the measure of the profit a company makes per dollar of revenue and is calculated by dividing net income by revenue. Net income is the revenue left after all expenses and income streams have been subtracted. This includes COGS, one-time payments, secondary operations, operational expenses, investments, taxes, and debts.

## Operating Profit Margin

This is also referred to as operating income margin, return on sales, and EBIT margin. It includes sales, overhead, administrative, and operating expenses required for the business. This involves all costs required to operate a business.

Operating Profit Margin equals operating income divided by revenue times 100