Profit Margin

Profit margin measures how much out of every dollar of revenue a company keeps as profit. There are three main types: gross margin (revenue minus cost of goods sold), operating margin (gross profit minus operating expenses), and net margin (total revenue minus all expenses including taxes and interest).

Different industries have very different typical margins. Software companies might have 70%+ gross margins, while grocery stores operate on 2-3% net margins. Comparing margins within the same industry is more meaningful than across different sectors.

Improving profit margins involves either increasing revenue or decreasing costs. Strategies include raising prices, reducing production costs, eliminating waste, negotiating better supplier terms, and improving operational efficiency. Investors favor companies with expanding margins because it indicates growing profitability and competitive advantage.