What is a profit margin?

A profit margin is defined as the percentage of revenue that exceeds costs, which accurately reflects the financial health and profitability of a business. This metric is essential as it allows business owners to understand how much of their revenue remains after all operating expenses, taxes, and costs of goods sold are subtracted. In essence, a higher profit margin indicates a more profitable company, as it signals that a greater portion of revenue is being converted into profit.

The concept of profit margin is critical for businesses in managing their finances and making informed decisions, as it offers a clear view of how efficiently a company turns revenues into profits. Understanding profit margins can help businesses to price their products effectively, control costs, and identify opportunities for increasing profitability.

Overall, the correct answer highlights the core idea of profit margin—its role in gauging the profitability of a business by examining the relationship between revenue and costs.