The profit margin ratio, also called the return on sales ratio or gross profit ratio, is a profitability ratio that measures the amount of net income earned with each dollar of sales generated by comparing the net income and net sales of a company.
In other words, the profit margin ratio shows what percentage of sales are left over after all expenses are paid by the business.
- Easily screen companies that are highly profitable
- Distorted by one-off gains or extraordinary one-off expenses
- Can only be used to compare companies in the same industry
Net margin measures how successful a company has been at the business of marking a profit on each dollar sales. It is one of the most essential financial ratios. Net margin includes all the factors that influence profitability whether under management control or not. The higher the ratio, the more effective a company is at cost control.
Compared with industry average, it tells investors how well the management and operations of a company are performing against its competitors.
Compared with different industries, it tells investors which industries are relatively more profitable than others.