Profit margins are a measure of a company's profitability, showing how much money it makes after covering its costs. It is calculated by taking the difference between revenue and expenses, then dividing that number by the revenue. For example, if a company earns $100 in sales and spends $80 on expenses, its profit margin would be 20%. This means that for every dollar earned, 20 cents is profit. Understanding profit margins helps businesses like small retailers or large corporations assess their financial health. A higher profit margin indicates a more efficient operation, while a lower margin may signal the need for cost-cutting or price adjustments. This metric is crucial for investors and managers alike.