How to Calculate Profit Margin (2024)

Profit margin is one of the simplest and most widely used financial ratios in corporate finance. A company’s profit is calculated at three levels on its income statement, each with corresponding profit margins calculated by dividing the profit figure by revenue and multiplying by 100.

The most basic is gross profit, while the most comprehensive is net profit. Between these two lies operating profit.

Key Takeaways

  • Profit margin conveys the relative profitability of a firm or business activity by accounting for the costs involved in producing and selling goods.
  • Margins can be computed from gross profit, operating profit, or net profit.
  • The greater the profit margin, the better, but a high gross margin along with a small net margin may indicate that further investigation is needed.
  • Profit margins vary by industry and should only be compared to those of similar companies.
  • You can use computer software, such as Microsoft Excel, to quickly calculate profit margins.

Types of Profit Margins

There are three different types of profit margins: gross profit margins, operating profit margins, and net profit margins. Each one provides you with a peek at how efficiently a company is operating.

Gross Profit Margin

Gross profit is the simplest profitability metric because it defines profit as all income that remains after accounting for the cost of goods sold (COGS). COGS includes only those expenses directly associated with the production or manufacture of items for sale, including raw materials and the wages for labor required to make or assemble goods.

Excluded from this figure are, among other things, any expenses for debt, taxes, operating, or overhead costs, and one-time expenditures such as equipment purchases. The gross profit margin compares gross profit to total revenue, reflecting the percentage of each revenue dollar that is retained as profit after paying for the cost of production.

The formula for gross profit margin is:

GPM=NetsalesCOGSNetsales×100where:GPM=Grossprofitmargin\begin{aligned}&\text{GPM}=\frac{\text{Net sales}-\text{COGS}}{\text{Net sales}}\times100\\&\textbf{where:}\\&\text{GPM}=\text{Gross profit margin}\end{aligned}GPM=NetsalesNetsalesCOGS×100where:GPM=Grossprofitmargin

Operating Profit Margin

Operating profit is a slightly more complex metric, which also accounts for all overhead, operating, administrative, and sales expenses necessary to run the business on a day-to-day basis. While this figure still excludes debts, taxes, and other nonoperational expenses, it does include the amortization and depreciation of assets.

By dividing operating profit by revenue, this mid-level profitability margin reflects the percentage of each dollar that remains after payment for all expenses necessary to keep the business running.

The formula for operating profit margin is:

OPM=OperatingIncomeRevenue×100where:OPM=Operatingprofitmargin\begin{aligned}&\text{OPM}=\frac{\text{Operating Income}}{\text{Revenue}}\times100\\&\textbf{where}:\\&\text{OPM}=\text{Operating profit margin}\end{aligned}OPM=RevenueOperatingIncome×100where:OPM=Operatingprofitmargin

Net Profit Margin

The net profit margin reflects a company’s overall ability to turn income into profit. The infamous bottom line, net income, reflects the total amount of revenue left over after all expenses and additional income streams are accounted for. This includes not only COGS and operational expenses, as referenced above, but also payments on debts, taxes, one-time expenses or payments, and any income from investments or secondary operations.

The formulas for net profit margin are either:

NPM=(RCGSOPEOTEITR)×100orNPM=(NetincomeR)×100where:NPM=NetprofitmarginR=RevenueCGS=CostofgoodssoldOPE=OperatingexpensesOTE=OtherexpensesI=InterestT=Taxes\begin{aligned}&\text{NPM}=\left(\frac{\text{R}-\text{CGS}-\text{OPE}-\text{OTE}-\text{I}-\text{T}}{\text{R}}\right)\times100\\&\quad\qquad\qquad\qquad\qquad\qquad\textbf{\ or}\\&\quad\qquad\qquad\text{NPM}=\left(\frac{\text{Net income}}{\text{R}}\right)\times100\\&\textbf{where:}\\&\text{NPM}=\text{Net profit margin}\\&\text{R}=\text{Revenue}\\&\text{CGS}=\text{Cost of goods sold}\\&\text{OPE}=\text{Operating expenses}\\&\text{OTE}=\text{Other expenses}\\&\text{I}=\text{Interest}\\&\text{T}=\text{Taxes}\end{aligned}NPM=(RRCGSOPEOTEIT)×100orNPM=(RNetincome)×100where:NPM=NetprofitmarginR=RevenueCGS=CostofgoodssoldOPE=OperatingexpensesOTE=OtherexpensesI=InterestT=Taxes

What Is a Good Profit Margin?

That depends on the company and the industry. That’s because profit margins vary from industry to industry, which means that companies in different sectors aren’t necessarily comparable. So, for example, a retail company’s profit margins shouldn’t be compared to those of an oil and gas company.

Having said that, you can use a scale of how a business is doing based on its profit margin. A profit margin of 20% indicates a company is profitable, while a margin of 10% is said to be average. It may indicate a problem if a company has a profit margin of 5% or under.

There are some studies that analyze profit margins by industry. New York University analyzed a variety of industries with net profit margins ranging anywhere from about -29% to as high as 33%. For instance, the study showed that the hotel/gaming sector had an average net profit margin of -28.56%, while banks in the money sector had an average net profit margin of 32.61%.

Regardless of where the company sits, it’s important for business owners to review their competition as well as their own annual profit margins to ensure they’re on solid ground.

How to Calculate Profit Margin in Excel

You may find it easier to calculate your gross profit margin using computer software. One of the most common ones on the market is Microsoft Excel. Using spreadsheets can make things a little easier. Before you sit down at the computer to calculate your profit, you’ll need some basic information, including revenue and the cost of goods sold.

In the first column (let’s say this is Column A), input your revenue figures. In the next one (Column B), note the COGS. In Column C, you’ll want to input the formula for your overall profit. So if you have figures in cells A2 and B2, the value for C2 is the difference between A2 and B2. Your profit margin will be found in Column D. You’ll have to input the formula, though: (C2/A2) × 100.

The table below is fairly simple but gives you an idea of how it works:


Example of Profit Margin

For the fiscal year ended Oct. 3, 2021, Starbucks (SBUX) recorded revenue of $29.06 billion. Gross profit and operating profit clock in at $20.32 billion and $4.87 billion, respectively. The net profit for the year is $4.2 billion. The profit margins for Starbucks would therefore be calculated as:

  • Gross profit margin = ($20.32 billion ÷ $29.06 billion) × 100 = 69.92%
  • Operating profit margin = ($4.87 billion ÷ $29.06 billion) × 100 = 16.76%
  • Net profit margin = ($4.2 billion ÷ $29.06 billion) × 100 = 14.45%

This example illustrates the importance of having strong gross and operating profit margins. Weakness at these levels indicates that money is being lost on basic operations, leaving little revenue for debt repayments and taxes. The healthy gross and operating profit margins in the above example enabled Starbucks to maintain decent profits while still meeting all of its other financial obligations.

How to Improve Your Profit Margin

If you are a business owner, improving your profit margin is an important part of growing your company. Your profit margin shows how much money you make from every dollar of your gross revenue. When you improve your profit margin, you actually make more money without needing to increase sales or gross revenue.

Track Income and Expenses

Hopefully, you are already tracking your profits. But to improve your profit margins, you also need to know how much you are spending.

Every expense lowers your profit margin. Sometimes this is unavoidable; you will need to pay for supplies, website hosting, employee salaries, and many other expenses. But by tracking your expenses, you’ll be able to identify unnecessary expenses that can be trimmed to increase your profit margin.

Buy in Bulk

Does your business regularly buy and use the same supplies over and over? These could be for daily operations, to make goods, or even to ship products to customers. Whatever your regular supplies are, don’t just buy them when you need them. Pay attention to the price, and buy in bulk when prices are low or supplies are on sale.

When you buy in bulk, you pay less on average per item, which further decreases expenses and increases the profit made on each sale.

Increase Efficiency

Are there any parts of the business process that you can automate? No matter what type of business you run, taking more time costs more money.

Is there software you can use to collect and organize customer information? Can you use tracking software to manage shipping data and customer notifications? Automating some steps in the process or finding other ways to increase efficiency can save both time and money, allowing you to make more sales in the same amount of time and increase your profit margin per sale.

Never increase efficiency at the expense of your customers, employees, or product quality. While this may initially increase your profit margins, the long-term effects will negatively impact your customers’ experiences, which can cause higher rates of returns, decreased sales, poor employee performance, and other problems that can lower your business’s credibility and decrease your profit margin.

Prioritize Customer Retention

Finding new customers and marketing your goods or services to them consumes time and is expensive. But when you focus on ways to increase customer retention, you can continue to make sales to the same people over and over without the expense of lead generation and conversion.

Use automated emails—or personal ones!—to follow up with new customers. Offer discounts for repeat purchases. Show customers you value them through your social media communication or a rewards program. When your marketing expenses go down for each sale, the profit of that sale goes up, increasing your profit margin.

Know What Sells

You know which of your products customers like. If there is an item or a service that isn’t popular, continuing to invest time and money in creating, storing, promoting, and otherwise trying to sell it will increase the expense of each sale without making you more profit.

Many businesses regularly eliminate low-performing inventory or change their service offerings. If a product or service sells well, keep it around. But cutting low performers will lower your costs and increase your sales, which will raise your profit margin as well.

What Is a Good Net Profit Margin?

A good net profit margin varies widely among industries. Margins for the utility industry will vary from those of companies in another industry. According to a New York University analysis of industries in January 2022, the average profit margins range from nearly 29% for railroad transportation to almost -20% for renewable and green energy. The average net profit margin for general retail sits at 2.65%, while the average margin for restaurants is 12.63%.

So, a good net profit margin to aim for as a business owner or manager is highly dependent on your specific industry. It’s important to keep an eye on your competitors and compare your net profit margins accordingly. Additionally, it’s important to review your own business’s year-to-year profit margins to ensure that you are on solid financial footing.

Which Profit Margin Formula Is the Most Useful?

The most significant profit margin is likely the net profit margin, simply because it uses net income. The company’s bottom line is important for investors, creditors, and business decision makers alike. This is the figure that is most likely to be reported in a company’s financial statements.

However, each formula has its own value for internal analysis. The gross profit margin can be used by management on a per-unit or per-product basis to identify successful vs. unsuccessful product lines. The operating profit margin is useful to identify the percentage of funds left over to pay the Internal Revenue Service and the company’s debt and equity holders.

Are There Other Profit Margin Formulas?

Yes. An adjusted gross margin is also useful for internal analysis. It is similar to gross profit margin, but it includes the carrying cost of inventory. Two companies with similar gross profit margins could have drastically different adjusted gross margins depending on the expenses that they incur to transport, insure, and store inventory.

Profit margin can also be calculated on an after-tax basis, but before any debt payments are made. This is referred to as an after-tax unadjusted margin. It more directly identifies the funds left over to pay lenders.

The Bottom Line

Profitability metrics are important for business owners because they highlight points of weakness in the operational model and enable year-to-year performance comparison. For investors, a company’s profitability has important implications for its future growth and investment potential. In addition, this type of financial analysis allows both management and investors to see how the company stacks up against the competition.

Profit margins are used to determine how wella company’s management is generatingprofits. It’s helpfulto compare the profit margins over multipleperiods and with companies within the same industry.

Article Sources

Investopedia requires writers to use primary sources to support their work. These include white papers, government data, original reporting, and interviews with industry experts. We also reference original research from other reputable publishers where appropriate. You can learn more about the standards we follow in producing accurate, unbiased content in oureditorial policy.

  1. New York University, Stern School of Business. “Margins by Sector (U.S.).”

  2. U.S. Securities and Exchange Commission. “Starbucks Corp. Form 10-K, for the Fiscal Year Ended October 3, 2021,” Page 41 (Page 44 of PDF).

How to Calculate Profit Margin (2024)


How to Calculate Profit Margin? ›

Generally speaking, a good profit margin is 10 percent but can vary across industries. To determine gross profit margin, divide the gross profit by the total revenue for the year and then multiply by 100. To determine net profit margin, divide the net income by the total revenue for the year and then multiply by 100.

How do I calculate my profit percentage? ›

Profit Percentage Formula

Profit percentage (%) is the amount of profit expressed in terms of percentage. This profit is based on the cost price, hence, the formula to find the profit percentage is: (Profit/Cost Price) × 100.

How do I calculate a 25% profit margin? ›

Gross margin as a percentage is the gross profit divided by the selling price. For example, if a product sells for $100 and its cost of goods sold is $75, the gross profit is $25 and the gross margin (gross profit as a percentage of the selling price) is 25% ($25/$100).

How to calculate the margin of a product? ›

(Revenue – Cost of goods sold)/Revenue = Sales margin

The common pitfall of calculating sales margin is failing to factor in all of the costs that go into making and selling the item when determining the “cost of goods sold” field.

How do I calculate a 40% margin? ›

How to Calculate Profit Margin. Divide gross profit by revenue: $20 / $50 = 0.4. Express it as percentages: 0.4 * 100 = 40%. This is how you calculate profit margin… or simply use our gross margin calculator!

How do I calculate profit margin? ›

Generally speaking, a good profit margin is 10 percent but can vary across industries. To determine gross profit margin, divide the gross profit by the total revenue for the year and then multiply by 100. To determine net profit margin, divide the net income by the total revenue for the year and then multiply by 100.

How to calculate profit for a small business? ›

Profit is simply total revenue minus total expenses. It tells you how much your business earned after costs. Since the primary goal of any business is to earn money, profit is a clear indication of how your company is functioning and performing in the market.

What is a margin calculator? ›

As previously mentioned, the marginal profit calculator lets you know the difference between your selling cost and the amount you spent to make the product, and markup is the difference between your selling price and your profit.

What is the formula for margin markup? ›

By definition, the markup percentage calculation is cost X markup percentage, and then add that to the original unit cost to arrive at the sales price. For example, if a product costs $100, the selling price with a 25% markup would be $125: Gross Profit Margin = Sales Price – Unit Cost = $125 – $100 = $25.

What's a good profit margin? ›

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. As a rule of thumb, 5% is a low margin, 10% is a healthy margin, and 20% is a high margin.

What is the formula for calculating gross profit margin? ›

This requires first subtracting the COGS from a company's net sales or its gross revenues minus returns, allowances, and discounts. This figure is then divided by net sales, to calculate the gross profit margin in percentage terms.

How do you apply margin formula? ›

Margin = [(Selling Price - Cost) / Selling Price] x 100

Using the same example as above, your calculation would be [($30 - $23) / $30] x 100. The gross margin, therefore, works out to be 23.33%.

How to calculate percentage? ›

How do you calculate a percentage? To calculate a percentage, you typically divide the part (the smaller value) by the whole (the larger value), and then multiply the result by 100. This gives you the percentage value as a number between 0 and 100.

How do I calculate profit percentage? ›

How to calculate profit margin (profit margin formula): 3 steps
  1. Determine your business's net income (Revenue – Expenses)
  2. Divide your net income by your revenue (also called net sales)
  3. Multiply your total by 100 to get your profit margin percentage.
May 6, 2024

How do you calculate 20% profit on a selling price? ›

Here's how you can calculate a 20 percent profit margin:
  1. Change 20 percent to its decimal form of 0.20.
  2. Subtract 0.2 from 1, equalling 0.8.
  3. Divide the original price of your product by 0.8.
  4. This number is what your sale price should be if you want a 20 percent profit margin.
Dec 8, 2023

How to calculate profitability? ›

The simplest measure of profitability is net income, which is revenue minus expenses. This shows the amount of income you generate from your business after accounting for all expenses.

How do you calculate profit gain percentage? ›

Take the selling price and subtract the initial purchase price. The result is the gain or loss. Take the gain or loss from the investment and divide it by the original amount or purchase price of the investment. Finally, multiply the result by 100 to arrive at the percentage change in the investment.

What is the formula for average profit percentage? ›

Formulas to Calculate Profit
Formula for ProfitProfit = S.P – C.P.
Formula for Profit PercentageProfit Percent Formula = P r o f i t × 100 C . P .
Gross Profit FormulaGross Profit = Revenue – Cost of Goods Sold
Profit Margin FormulaProfit Margin = T o t a l I n c o m e N e t S a l e s × 100
1 more row

What is the formula for cash profit? ›

Cash profit is a measure of a company's financial health, calculated as the cash inflows from operating activities minus the cash outflows from operating activities.

What's a good profit percentage? ›

A net profit of 10% is generally regarded as a good margin for most businesses, while 20% and above is regarded as very healthy. A net profit margin of less than 5% is relatively low in most industries and can indicate financial risk and unsustainability.


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