What does profit margin measure?

Profit margin is a key profitability ratio that assesses the financial health of a company by calculating the proportion of net income to total revenue. Specifically, it is determined by taking net income, which reflects the earnings of the company after all expenses, taxes, and costs have been deducted, and dividing it by total revenue, which is the total income generated from business operations.

The measurement of profit margin provides insights into how effectively a company is converting revenue into profit. A higher profit margin indicates that the company retains a greater share of revenue after covering costs, which is valuable information for investors assessing the efficiency and profitability of a business. By focusing on this ratio, stakeholders can compare companies within the same industry to evaluate which one is more adept at managing expenses in relation to revenue.

The other options describe different financial metrics or aspects of a business. Total revenue generated during a fiscal year is a raw figure that does not provide insight into profitability; costs associated with producing goods relate to operational efficiency rather than the overall profit derived from those operations; and the amount of capital required for business expansion pertains to funding needs rather than measuring profit. Therefore, the correct understanding of profit margin is encapsulated in the information provided in the chosen answer.