NET MARGIN

What is a Profit Margin?

In accounting and finance, a profit margin is a measure of a company’s
earnings (or profits) relative to its revenue. The three main profit margin
metrics are gross profit margin (total revenue minus cost of goods sold
(COGS) ), operating profit margin (revenue minus COGS and operating
expenses), and net profit margin (revenue minus all expenses, including
interest and taxes). This guide will cover formulas and examples, and even
provide an Excel template you can use to calculate the numbers on your own.

Profit Margin Formula

When assessing the profitability of a company, there are three primary margin
ratios to consider: gross, operating, and net. Below is a breakdown of each
profit margin formula.

Gross Profit Margin = Gross Profit / Revenue x 100

Operating Profit Margin = Operating Profit / Revenue x 100

Net Profit Margin = Net Income / Revenue x 100

As you can see in the above example, the difference between gross vs net is
quite large. In 2018, the gross margin is 62%, the sum of $50,907 divided by
$82,108. The net margin, by contrast, is only 14.8%, the sum of $12,124 of net
income divided by $82,108 in revenue.

Profit Margin Example

Let’s consider an example and use the formulas displayed above. XYZ
Company is in the online retail business and sells custom printed t-shirts. The
revenue from selling shirts in 2018 is $700k, the cost of goods sold (the direct
cost of producing the shirts) is $200k, and all other operating expenses (such
as selling, general, administrative (SG&A), interest and taxes) are $400k.
Calculate the gross and net profit margins for XYZ Company in 2018.

Income Statement:

$700,000 revenue

($200,000) cost of goods sold

$500,000 gross profit

($400,000) other expenses

$100,000 net income

Based on the above income statement figures, the answers are:

Gross margin is equal to $500k of gross profit divided by $700k of revenue,

which equals 71.4%.

Net margin is $100k of net income divided by $700k of revenue, which

equals 14.3%.

What is a Good Profit Margin?

You may be asking yourself, “what is a good profit margin?” A good
margin will vary considerably by industry, but as a general rule of thumb,

1) A 10% net profit margin is considered average( Healthy Margin ),

2) A 20% margin is considered high (or “good”)( High Margin )

. A 5% margin is low.

Again, these guidelines vary widely by industry and company size, and
can be impacted by a variety of other factors.

But in general, a healthy profit margin for a small business tends to

range anywhere between 7% to 10%. Keep in mind, though, that certain
businesses may see lower margins, such as retail or food-related companies.
That's because they tend to have higher overhead costs.

An NYU report on U.S. margins revealed the average net profit margin is
7.71% across different industries. But that doesn’t mean your ideal profit margin
will align with this number.

Profit Margin Formula Excel (and Calculator)

Below is a screenshot of CFI’s profit margin Excel calculator. As you can

see from the image, the Excel file allows you to input various assumptions over
a five year period. All cells with blue font and light grey shading can be used
to enter your own numbers. All cells with black font are formulas and don’t
need to be edited.

As you can see from the screenshot, if you enter a company’s revenue,
cost of goods sold, and other operating expenses you will automatically get
margins for Gross Profit, EBITDA, and Net Profit. EBIT (earnings before interest
and taxes) is the same thing as Operating Profit; EBITDA is slightly more
refined, closer to Net Profit.

To edit the Excel calculator, you can insert or delete rows as necessary,
based on the information you have. For example, to add more expense line
items such as “Salaries and Wages”, simply insert a row for each one and add
the numbers as appropriate.

More Company Performance Metrics

When analyzing a company a good analyst will look at a wide range of

ratios, financial metrics, and other measures of performance. Below is a list of
commonly used performance metrics that analysts often consider in order to
compile a complete and thorough analysis of a business.

Additional performance metrics include:

  Revenue Growth Rate
 Return on Equity (ROE)
 Return on Assets (ROA)
 Internal Rate of Return (IRR)
 Cash Flow Yield
 Dividend Yield
 Net Present Value (NPV)

Which financial metrics are most important will vary by company and
industry. For example, ROE may be a key metric in determining the
performance of Company A, while the most helpful metric in analyzing
Company B might be revenue growth rate.

Key metrics are often ones where a company’s performance – as indicated

by the metric – is substantially different (whether better or worse) from that of
most of its competitors. By considering the above factors along with the
profitability margins covered in this article, you’ll be well on your way to
performing complete financial analyses.

What Is a Good Gross Profit Margin Ratio?

A company's gross profit margin ratio compares the company's gross margin
to its total revenue. It is expressed as a percentage. So if the ratio is 25%, that
means that the company's gross profit margin is 25 cents for every dollar in
sales.

Higher gross profit margin ratios generally mean that businesses do well at
managing their sales costs. But there's no good way to determine what
constitutes a good gross profit margin ratio. That's because some sectors
tend to have higher ratios than others. So it's not a one-size-fits-all approach.

What Are Good Gross Profit Margins for Various Major

Industries?
NYU's Stern Business School releases sector-related data on a regular basis.
According to the school's margin report from January 2022, the average
 gross profit margin for education companies was 47.9%. Machinery
companies saw gross margins of 35.4% while real estate developers saw
margins of 28.9%. Oilfield services and equipment companies saw gross
margins of 7.9% and air transport companies raked in gross margins of 1.4%.
Financial services saw some of the highest, including regional banks at
99.8%.1

What Is a Good Profit Margin for a Small Business?

The profit margin for small businesses depend on the size and nature of the
business. But in general, a healthy profit margin for a small business tends to
range anywhere between 7% to 10%. Keep in mind, though, that certain
businesses may see lower margins, such as retail or food-related companies.
That's because they tend to have higher overhead costs.

Average profit margins by industry.

Your profit margin can tell you how well your business performs compared to
other market players in your industry.

Although there’s no magic number, a good profit margin will typically fall
between 5% and 10%. Below, we’ve compiled the net profit margins for common
business sectors.

 Advertising: 3.30%

 Apparel: 5.87%
 Auto and truck: 3.04%

 Auto parts: 3.05%

 Beverage (alcoholic): 7.94%

 Beverage (soft): 18.50%

 Brokerage and investment banking: 17.62%

 Building materials: 4.30%

 Business and consumer services: 3.83%

 Computer services: 4.34%

 Drugs (pharmaceutical): 18.38%

 Education: 9.59%

 Electronics (consumer and office): -3.14%

 Electronics (general): 5.70%

 Engineering and construction: 1.00%

 Entertainment: 11.73%

 Farming and agriculture: 2.47%

 Financial services (non-bank and insurance): 26.94%

 Furniture and home furnishings: 5.15%

 Healthcare products: 9.27%

 Household products: 4.73%

 Information services: 19.13%

 Insurance (general): 6.26%

 Investments and asset management: 21.06%

 Office equipment and services: 4.91%

 Publishing and newspapers: -1.64%

 REIT: 15.17%

 Real estate (development): 6.65%

 Real estate (general and diversified): 19.75%

 Real estate (operations and services): 3.59%

 Recreation: 1.15%

 Restaurants and dining: 10.57%

 Retail (general): 2.44%

 Retail (grocery and food): 1.44%

 Retail (online): 4.57%

 Shoe: 10.48%

 Software (entertainment): 20.53%

 Software (internet): 2.07%

 Software (system and application): 19.54%

 Transportation: 3.79%
If you don’t see your industry above, check the full list on the U.S. Margins by
Sector page. You can also see the gross margin, operating margin, and other
standard financial metrics for each sector.