[Learner101]

I do not have an accountant background so I'm wondering if someone can explain to me in plain English what these terms are and the difference between them: Return on Investment vs Profit Margin.

Thanks!

[ebaines]

Return on investment is a measure of profit versus the amount of money invested to get that profit. It's the profit made per year divided by the up-front investment cost. So for example if you invest $1000 in tooling and R&D to develop a new product, and you make $100 in profit in a year, then your ROI is 10%.

Profit margin is a measure of how much profit you make on each widget sold. It may be expressed either as a dollar amount or as a percent of revenue. For example: if the cost of a widget is $75 and you sell it for $100, you have $25 margin per widget sold. This is usually called gross margin, as it only included direct cost of goods sold. You can then allocate a portion of expenses that the company bears that are not direct COGS - such as selling and administration. For example suppose you allocate $5/unit for G&A expenses to each widget sold - in this case the gross profit per unit is $100-($75+$5) = $20/unit. So the profit margin is $20/unit, and profit margin as a percent of revenue is then $20/$100 = 20%.

Hope this helps.