A profitability measure which relates net income to sales:
For example, if net income and sales of a given company are $30,000 and $270,000, respectively; then, its profit margin is:
Profit margin= 30,000/ 270,000= 11.11%.
It indicates that the company generates more than 11 cents in profit for every dollar in sales revenue. Generally speaking, the higher this ratio, the better. However, this ratio differs substantially from industry to another. Retail stores have a low profit margin (2-3%), while specialty goods sell for considerably higher margins (20-30% and even more).
It is also referred to as return on sales (ROS).
