profit margin

Profit margin, also called net profit margin, is a financial ratio expressed as a percentage that measures how much of a company’s revenue remains as profit after deducting costs. The formula to calculate a net profit margin is revenue subtracted by cost of goods sold, divided by revenue, and then multiplied by 100. By contrast, gross profit margin is calculated using only the cost of goods sold and measures profitability before accounting for operating and non-operating expenses, such as expenses, interest, and taxes.

A higher profit margin generally reflects greater operational efficiency and profitability, but it does not necessarily indicate strong cash flow or overall financial health. High margins can also attract competitors, potentially reducing long-term profitability. Profit margin is therefore one of several key indicators used to evaluate business performance rather than a determinative measure on its own.

Under federal securities regulations, publicly traded companies are required to file annual reports on Form 10-K with the U.S. Securities and Exchange Commission (SEC). These reports include detailed financial statements that allow investors and analysts to calculate and assess profit margins.

[Last reviewed in October of 2025 by the Wex Definitions Team] 

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