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Profit Margin

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Profit margin is shorthand for net profit margin, or earnings divided by sales. Thus if a company sells $100,000 in merchandise and has earnings of $12,000, its profit margin is 12%. As a general rule, an improving (ie, a higher) profit margin is a favorable sign. But note that the profit margin is only one element in measuring a company's ability to generate profits. For example, a company may maintain a high profit margin, but only by keeping prices high, thus reducing sales. By lowering prices and sacrificing some profit margin, the company may be able to increase sales sufficiently to more than offset the reduced profit margin. On the other hand, if a company can maintain the same level of sales while cutting cost of goods sold, SG&A expense, or taxes, it can increase its profit margin and raise total earnings as well. Because a gross profit margin, operating profit margin, and pretax profit margin are commonly computed for a company, it's better to avoid ambiguity and not use "profit margin" when "net profit margin" is meant.



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