What is the equation for determining Profit Margin?

Profit margin is a key financial metric that measures how much of every dollar in sales translates into profit. It is calculated using the formula that divides net income by sales. This ratio gives insight into a company’s ability to control costs and generate profit from its revenues.

When a company makes sales, it incurs various costs, and the profit margin reflects how effectively it turns those sales into actual profit after all expenses have been accounted for. A higher profit margin indicates a more efficient company in terms of selling its goods or services profitably.

The other options do not represent the profit margin:

• Dividing gross profit by total assets would provide insights into asset utilization but not directly relate to profitability from sales.
• Calculating net sales divided by total revenue does not yield profitability; rather, it reflects sales performance.
• The ratio of total expenses to revenue indicates cost management, but does not show the profitability aspect since it doesn't account for net income.

Thus, the formula for profit margin—net income divided by sales—accurately provides the measure of profitability per dollar of sales.