# How to Calculate Income as a Percentage of Revenue

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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 if it's trending down, then it could be a sign to stay away from this particular stock.

How to calculate income as a percentage of revenue
Profitability, sometimes called profit margin or net margin, is determined by calculating income as a percentage of revenue. The two figures that we need for this calculation are found in the income statement.

First, take the net income figure, which is the company's bottom-line profit after paying out all operating expenses, interest, and taxes. In this example, let's say Acme Widgets's (Ticker: WIDG) net income amounts to \$7.1 million in its last complete fiscal year.

Next, locate net revenue, which can also be called net sales. In this case, Acme booked \$46 million of revenue last year. Now we have everything that we need to perform our two-step calculation:

1. Divide net income by net revenue (\$7.1 million)/ (\$46 million) = 0.1543.
2. Multiply that result by 100 (0.1543) X (100) = 15.43%.

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%.