What does the profit margin indicate?

The profit margin is a key financial metric that measures the amount of revenue that exceeds a company's costs, ultimately reflecting its profitability. It is calculated by dividing net income by total revenue, resulting in a ratio that expresses how much profit a company makes for every dollar of revenue generated. A higher profit margin indicates a more profitable operation, as it demonstrates that the company retains a larger portion of revenue after covering its costs. This ratio is especially valuable for assessing how well a company converts sales into actual profit, enabling comparisons across companies and industries to gauge relative performance.

The other choices do not accurately describe what the profit margin indicates. While total expenses relative to total revenue may provide insights into cost management, it does not directly relate to profitability. Similarly, total sales income before costs does not account for the necessary expenses that impact a company’s net income, and total liabilities relative to assets refers to solvency rather than profitability. Thus, the correct answer emphasizes the essential focus of the profit margin on profitability.