How is "profit margin" calculated?

• A. The ratio of expenses to revenue
• B. The difference between revenue and costs as a percentage
• C. The average income of employees
• D. The total assets divided by total liabilities

Answer: (B)

Profit margin is calculated by determining the difference between revenue and costs, and then expressing that difference as a percentage of the revenue. This metric is essential for assessing a company's financial health, as it shows how much profit is made for every dollar of sales. A higher profit margin indicates a more efficient business model, as it reflects greater income relative to expenses.

The formula for calculating profit margin is:

Profit Margin = (Revenue - Costs) / Revenue × 100%.

This approach allows businesses to gauge their ability to convert sales into actual profit, which is crucial for strategic planning and competitiveness in the marketplace. Understanding profit margin helps stakeholders evaluate how well a company generates profit relative to its sales.