Profit percentage is the net earnings generated by a business, divided by its sales. The resulting proportion of sales shows how well management can generate profits from a given sales level. This is the primary measure of corporate performance. The percentage is commonly used in two ways to evaluate a business, which are:
- Trend line. The profit percentage for multiple periods is plotted on a trend line, to discern any spikes or dips in the trend. One can then investigate the reasons for these changes.
- Industry analysis. The profit percentages of the best competitors in the industry are compared to the percentage for the subject company, to see how well its performance compares.
The profit percentage concept can also be applied to the gross margin and operating margin to derive a percentage, which can then be analyzed in a similar manner.