Margin

Common Types of Margins

1. Gross Profit Margin

What It Is: Shows the money remaining from sales after subtracting the cost of goods sold (COGS).

Formula:

Gross Profit Margin = (Gross Profit / Revenue) × 100

Example:

If a company makes $400 in profit from $1,000 in sales:

Gross Profit Margin = (400 / 1,000) × 100 = 40%

Why It Matters: Indicates efficiency in managing production costs and profitability.

2. Operating Margin

What It Is: Shows the percentage of revenue remaining after covering operating expenses like salaries and rent.

Formula:

Operating Margin = (Operating Income / Revenue) × 100

Example:

If the operating income is $200 from $1,000 in sales:

Operating Margin = (200 / 1,000) × 100 = 20%

Why It Matters: Reflects the company’s ability to manage day-to-day operations efficiently.

3. Net Profit Margin

What It Is: Shows the percentage of sales left as profit after all expenses, taxes, and interest are paid.

Formula:

Net Profit Margin = (Net Income / Revenue) × 100

Example:

If net income is $100 from $1,000 in sales:

Net Profit Margin = (100 / 1,000) × 100 = 10%

Why It Matters: Demonstrates overall profitability and cost management.

4. Contribution Margin

What It Is: Measures how much revenue is left after covering variable costs to pay for fixed costs and generate profit.

Formula:

Contribution Margin = ((Sales Revenue − Variable Costs) / Revenue) × 100

Example:

If sales revenue is $1,000 and variable costs are $600:

Contribution Margin = ((1,000 − 600) / 1,000) × 100 = 40%

Why It Matters: Helps businesses evaluate their ability to cover fixed costs and generate profit.