What does profit margin measure in a business?

Profit margin is a financial metric that evaluates how effectively a company converts its revenue into profit after accounting for all operating expenses. It specifically measures the portion of revenue that remains as profit once all costs, such as costs of goods sold, operating expenses, interest, taxes, and other expenses, have been deducted. This makes profit margin a crucial indicator of a business's profitability and operational efficiency.

When assessing a business's financial health, a higher profit margin indicates a more profitable company that retains more profit from each dollar of sales. In contrast, options that refer to total sales, net income before taxes, or revenue growth do not provide a comprehensive measure of profitability after all operational factors have been considered, which is the fundamental purpose of the profit margin. Thus, the choice that reflects profitability after all operating expenses, leading to a clear understanding of a company's financial performance, is the correct one.