How to Calculate Profit Margins in 3 Simple Steps

A profit margin helps a business know when they are doing great and when they are not doing well. Learn how to calculate profit margins so you can better understand your business's success.

Who needs to know how to calculate profit margins? A profit margin is a financial ratio primarily used in the business world by business owners and employees. 

When learning how to calculate profit margins. You'll learn about 3 main financial ratios. A business's profit is calculated on 3 levels. There is gross profit, operating profit, and net profit. All of these are calculated by taking the gross, operating, or net profit number and dividing this number by the revenue and then multiplying that number by 100. 

This number or percentage helps businesses to see how they are doing financially. If you own a small business or work in analytics for a company, you may need to learn how to calculate profit margins so you can analyze how your business is doing. 

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How to Calculate Gross Profit Margin

The first level to learning how to calculate profit margins is learning how to calculate gross profit margins. You need to know how to calculate gross profit margins to see how much the company is making after accounting for the cost of goods sold (COGS). To calculate gross profit margins, take the number of net sales minus the cost of goods sold and divide that number by the number of net sales. Then multiply that number by 100. 

gross profit margin formula

How to Calculate Operating Profit Margins

The second level to learning how to calculate profit margin is learning how to calculate operating profit margins. You need to know how to calculate operating profit margins to see how much the company is making after accounting for operational costs. To calculate operating profit margins, take the operating income number or profit divided by revenue. Then multiply that number by 100. 

operating profit margin formula

How to Calculate Net Profit Margins

The third level to learning how to calculate profit margin is learning how to calculate net profit margins. You need to know how to calculate net profit margins to see the company's bottom line. This figure shows how much the company is making in profit overall. To calculate net profit margins you first need to calculate net income. Find net income when you subtract the cost of goods sold, operating expenses, other expenses, interest paid, and taxes from the total revenue. Then divide that number by the total revenue and multiply that number by 100. 

net profit margin formula

Types of Profit Margins

There are other types of profit margins with extra formulas you can learn on your way to learning all about how to calculate profit margin. Gross profit margins, operating profit margins, and net profit margins are the main 3 calculations you need to know to learn how to calculate profit margin. These 3 financial ratios show the 3 levels of company success. But there are some other profit margin calculations that you can even use in your personal finance. 

How to Calculate Stock Profit

If you are learning how to calculate profit margins and you work at all with buying, selling, or trading stocks, then you need to know how to calculate stock profit. You need to know how to calculate stock profit margins to see how much money you are making when you sell a stock.

To calculate stock profit add together the stock purchased price (SPP) and the stock buying commission (BC). Then subtract this number from the stock selling price (SSP) minus the stock selling commission (SC). Divide this number by the stock purchased price (SPP) added to the stock buying commission (BC). You'll multiply this number by 100 to show stock profit expressed as a percentage. 

how to calculate stock profit

How to Calculate Economic Profit

If you are learning how to calculate profit margins and you are a business that participates in the economy then you also need to learn how to calculate economic profit margins. You need to know how to calculate economic profit margins to show the overall profit a company is making after everything including opportunity costs are taken into account. 

economic profit formula

How to Calculate Gross Profit Percentage

An extra step that can be really helpful when learning how to calculate profit margin is learning about profit percentages. You need to know how to calculate gross profit percentages to see these profit figures in an easy-to-understand percentage form. 

This will help you compare profit between different times of year and between different years. This will also help you more easily see if the company is doing better or worse without having to look at large monetary figures. 

In the calculations above, you'll notice that all of them ask you to multiply your final number by 100.

This is how you calculate profit margins so they are expressed as a percentage, by multiplying the final number by 100 and adding the percentage symbol. 

What's a Good Profit Margin?

Now that you know all about how to calculate profit margin, you can start using these numbers to analyze business growth. What's a good profit margin for your business?

 Different companies and different regions will all have different normal profit margins. But in general, a profit margin of 20% is a good profit margin, 10% is average, and 5% is below average. 

What's a Good Net Profit Margin? 

What's a good net profit margin for your business? In general, a good net profit margin is going to be around 20% or higher, while an average net profit margin is around 10%, and a below average net profit margin is around 5%. 

In Conclusion,

Learn how to calculate profit margin and you'll be able to accurately report on our business's growth and success.