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profit ratio
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profit ratio

business
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Quick Summary

Profit ratios are key metrics used in business to assess financial health by examining profit as a percentage of revenue. There are three primary types:12

  • Gross Margin: This is the percentage of sales revenue remaining after deducting the direct costs of producing goods or services (Cost of Goods Sold - COGS).1
    • Formula: [(Revenue - COGS) / Revenue] x 100
  • Operating Margin: This represents the percentage of sales revenue left after subtracting operating expenses, such as selling, general, and administrative (SG&A) costs, from gross profit.1
    • Formula: [(Revenue - COGS - SG&A) / Revenue] x 100
  • Net Margin: This is the "bottom line," showing the percentage of sales revenue remaining after all expenses, including interest and taxes, have been paid.1
    • Formula: [(Revenue - All Expenses) / Revenue] x 100

These ratios offer a quick overview of a company's profitability and operational efficiency.1

Summary created from Britannica articles using AI. AI can make mistakes, so verify using Britannica articles.
3 Britannica Sources
  1. Gross, operating, and net profit margins: Why they matter (and how to use them)
  2. business finance - Financial ratio analysis
  3. theory of production

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