What does "profit margin" indicate?

Profit margin is a financial metric that indicates the percentage of revenue that exceeds the costs associated with producing goods sold. It essentially provides insight into how much profit a company retains from its revenues after accounting for these direct costs. A higher profit margin implies that a company is more efficient at converting sales into actual profit, which is a crucial indicator of financial health and operational efficiency.

This measure is pivotal for businesses as it helps in assessing their pricing strategy, cost control, and overall profitability over time. Investors and stakeholders often use profit margin to compare the profitability of companies within the same industry, as it provides a standard way to assess performance relative to peers. Understanding this metric allows businesses to make informed decisions about pricing and resource allocation, ultimately contributing to strategic planning and financial health.