What does a profit margin measure?

A profit margin measures the percentage of revenue that is turned into profit. This metric is crucial for understanding a company's financial health and operational efficiency. It indicates how well a company can convert its sales into actual profit after accounting for all costs, expenses, and taxes. A higher profit margin means that a larger portion of revenue is retained as profit, which can signify effective management and strong pricing strategies.

In contrast, total revenue represents the total amount billed to customers for goods or services provided, regardless of the costs, which does not reflect profitability. The expenses incurred during a fiscal period show how much a company spends, but not necessarily how much profit is derived from revenues. Lastly, total assets owned by a business indicate the overall value of what the business owns but do not provide insight into profitability. Therefore, the profit margin provides a direct measure of profitability relative to sales, making it an essential indicator for assessing a business's financial performance.