A profit margin expresses a chosen profit measure as a percentage of revenue. Always name the measure: gross, operating and net profit answer different questions. A margin without that label is incomplete.
Follow one business through the calculation
A fictional retailer records £200,000 of revenue and £120,000 of cost of sales. Gross profit is £80,000, so gross margin is 40%. If other operating expenses total £50,000, operating profit is £30,000 and operating margin is 15%.
Suppose the retailer’s final net profit, after the remaining expenses and tax, is £20,000. Net margin is 10%. These figures describe the same business for the same period; they differ because each profit measure includes different costs.
Margin is not markup
Buy an item for £60 and sell it for £100. The £40 difference is 40% of the selling price, so the gross margin is 40%. It is approximately 66.7% of the cost, so the markup is approximately 66.7%. Using the wrong denominator is a common pricing mistake.
What does a falling margin mean?
Try a simple scenario. Keep revenue at £200,000 but increase cost of sales to £130,000. Gross margin falls to 35%, a drop of five percentage points. That is different from saying it fell by 5%: relative to the original 40% margin, the decline is 12.5%.
Possible explanations include higher input costs, discounting or a different sales mix. The ratio alone cannot identify which explanation applies. Compare the underlying amounts and the company’s commentary before drawing a conclusion.
Check the inputs
Use revenue and profit from the same reporting period and in the same currency and units. A negative profit gives a negative margin. Zero revenue makes the ratio undefined. Do not apply one “good margin” target to every industry: cost structures differ.
Our calculator lets you choose the profit label and enter the two amounts. It calculates the percentage; it does not verify accounting classifications or determine whether the business is financially healthy.
Put it into practice
Open the Profit Margin CalculatorChange one input at a time and compare the outcome with the worked example.
Sources and further reading
Sources checked 4 October 2026. Worked examples are fictional HC teaching illustrations.