The document explains profit margin as a measure of profitability, detailing how it reflects the difference between revenue generated from sales and incurred costs. It outlines four types of profit margins: gross profit margin, operating profit margin, pretax profit margin, and net profit margin, each with specific formulas for calculation. The conclusion emphasizes that profit margin represents the actual profit a company makes after expenses are deducted.

1. What Is Profit Margin?: Types Of Profit
Margins
Introduction:
The profit margin is a measureof profitability, which is a net profit ratio. Itis the
amount in which the generated revenue fromthe sales exceeds the incurred costs
in the business. In simpler terms, it means the income earned through making the
sales. Further simplifying, it can be said that it is total revenue minus the
expenses.
Individuals and businesses around theglobe carry out the for-profitbusiness
activities in order to earn handsomeprofit. The absolute numbers of the gross
sales, $xyz earnings, or thousand business expenses aredifficult to assess the
business’ performanceand profitability. Quantitative measures, such as profit
margin formula, are used to assess thebusiness’ performancefortnightly, weekly
or monthly basis. Largebusiness reports its profitability on an annual basis.
However, the small business is required to compute and report the profitmargin
on a weekly or monthly basis.
Thus, the performanceand profitability of the business areexamined and
recorded systematically and correctly.

2. Types of Profit Margins
There are four levels of profit margins. Theseinclude operating profit, gross
profit, net profit, and pre-tax profit. All of these types of profit margins are
reflected in the income statement sheets of the companies. They are explained
one by one below:
1. Gross Profit Margin
Gross profitis defined as a metric analyst, which is used for the assessmentof the
company’s financialhealth. Fromproduct sales, the cost of goods sold is
subtracted. This is how you get the leftover amount fromproductsales. This is
called the gross profitmargin.
Gross ProfitMargin=Net Sales – COGS
Net Sales
Where: COGS = Cost of Goods Sold
2. Operating Profit Margin
The operating profit margin shows up the profitthat is Company is making after
making payments for the variable costs such as raw material, production, wages,
etc. It is usually calculated before paying the taxes or interest rates. When
different kinds of expenses, such as administrative, selling, and general costs, are
subtracted fromthe company’s gross profitnumber, you getthe operating profit
margin. This is also known as the money before taxes and interests had been
applied. Itis mainly a profit that results from the company’s ongoing operations.
Operating Profit Margin = Operating Income
Revenue

3. 3. Pretax Profit Margin
The pretax profitmargin is calculated to measure the operational efficiency of the
Company. Itis the ratio that tells us the percentage of sales that the business had
made during the sales of the product. Itis usually carried out before the
deduction of taxes. The pretax margin is usually used for comparing the
profitability of different industries in the same market.
In order to calculate the pretax margin, you will need to take the operating
income, subtractthe interest expense as well as adding the interest income.
Then, the non-recurring items such as losses and gains fromdiscontinued
operations are added. Thus, you get the pretax profit margin.
4. Net Profit Margin
This is the most significant of all other types of profit margin. The net profit margin ratio
formula is measured by the division of net profits by the sales profits. Or, it can also be
calculated by the division of net profit by the revenue that is realized over a period of
time.
Mathematically, Profit Margin Formula = Net Profits (or Income) / Net Sales (or
Revenue)
= (Net Sales – Expenses) / Net Sales
= 1- (Expenses / Net Sales)
This is how the net profit margin is calculated in order to show the actual profits gained
by a company.
Conclusion
The profit margin is the actual profit made by the company after cutting the costs
and expenses.