How to Calculate Income as a Percentage of Revenue

By Motley Fool Staff – Updated Apr 29, 2025 at 11:15 PM EST

Key Points

Investing in high-profit companies is advised as stocks are tied to future earnings.
Profitability, measured by net income/revenue, aids in assessing and comparing firms.
A declining profit margin, like Acme's drop from 22% to 15%, signals potential issues.

All things being equal, investors prefer buying pieces of highly profitable companies. After all, a stock is just a claim against future earnings, and so we ultimately want an enterprise that produces substantial profits over time. Conversely, if profitability is lower than average or trending down, it could be a sign to stay away from this particular stock.

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Chart showing spiky line trending up and to the right with numbers in background. — Image source: Getty Images.

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Why does it matter?

This calculation tells us that Acme Widgets is a solidly profitable business. Specifically, for every $1 of sales that Acme logged last year, it generated $0.15 of income. In other words, its profit margin is 15%.

Profit margin is also useful in making comparisons between competitors and across time periods. For example, if Acme's two rivals in the industry both have 9% profit margins, then it suggests that Acme enjoys competitive advantages, such as brand strength or economies of scale, that allow it to generate profits that rivals just can't beat.