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The profit margin ratio formula can be calculated by dividing net income by net sales. Net sales is calculated by subtracting any returns or refunds from gross sales.nalysis. The profit margin ratio directly measures what percentage of sales is made up of net income. In other words, it measures how much profits are produced at a certain level of sales. This ratio also indirectly measures how well a company manages its expenses relative to its net sales.
Gross Profit Margin: The gross profit margin equation is typically used to determine the profit margin of a singular product or service, not of an organization as a whole. To determine the gross profit margin, a business looks at the retail price of its product and subtracts the cost of materials and labor used to produce it. It then divides that by the retail price. For example, if you sell a product for $25, and it costs $20 to make, the gross profit margin is 20% ($5 divided by $25). Net Profit Margin: This is often the equation used to determine an entire organizationâs profit margin. Net profit margin is calculated by taking the companyâs total sales for a given time period, subtracting total expenses and then dividing that figure by total revenue. For example, letâs say your company generates $10 million in sales and has operating expenses of $5 million.