How is the profit margin ratio calculated?



Q14. Profit margin ratio
How is the profit margin ratio calculated?

A14.
Profit margin ratio
= Net income / Sales

[Entity 14-a]
Net income = $200,000
Sales = $2,500,000
Profit margin ratio
= $200,000 / $2,500,000 = 8%

[Entity 14-b]
Net income = $300,000
Sales = $5,000,000
Profit margin ratio
= $300,000 / $5,000,000 = 6%

[Note]
Higher profit margin ratio –> more profitable.
Thus in this example, Entity 14-a is more profitable than Entity 14-b.