Accounting and Key Figures
What is Profit Margin? Formula and Interpretation
Profit margin is a profitability metric that indicates what proportion of revenue remains as profit. This key figure makes it easier to compare companies of different sizes than simply looking at the profit in Norwegian Kroner (NOK).
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Profit margin is a profitability metric that indicates what proportion of revenue remains as profit. This key figure makes it easier to compare companies of different sizes than simply looking at the profit in Norwegian Kroner (NOK).
Formula for Profit Margin
The term is used with slightly varying definitions. A common variant is based on profit before financial expenses relative to operating income:
Profit Margin = Profit before interest / Operating income × 100
Other sources use operating profit or profit before tax. Therefore, Proffi and other analysis services must specify the formula used. Two percentages cannot be compared if the basis of calculation is different.
Example
A company has 20 million Norwegian Kroner (NOK) in operating income and a relevant profit of 2 million NOK. The profit margin is then 10 percent. This means that ten øre (one hundredth of a krone) of every krone of revenue remains at this profit level.
What is a Good Profit Margin?
There is no single threshold that suits everyone. Grocery retail might have low margins and high volume, while consultancy can have higher margins and fewer physical investments. Compare with the same industry, roughly the same size, and over several accounting years.
An increasing profit margin can be due to better pricing, productivity, or cost control. A fall could result from higher wages, procurement costs, price competition, or investments in growth. Seasonality and one-off items can affect a single year.
Use Multiple Key Figures
Profit margin says little about how efficiently capital is used, how much debt the company has, or whether customers pay their invoices. Therefore, combine it with return on equity, liquidity, cash flow, and debt-to-equity ratio.
Profit Margin on Proffi
Display percentage, formula, data source, and history in the same module. Ideally, include industry median when comparable data is available, but explain the selection. Missing data and negative revenues must be handled explicitly.
Frequently asked questions
- Is profit margin the same as operating margin?
- Not necessarily. Operating margin uses operating profit, while profit margin can be defined using a different profit level.
- Can the profit margin be negative?
- Yes. In that case, the profit used in the formula is negative, and the business is losing money at that level.