Ever been to a clearance sale at a department store and wonder how a massive store like Macy's or Saks can have 50%, 60%, or even 75%-off sales and still remain in business? Ever wonder why that piece of cloth that an Italian designer calls a dress can be worth $2,400, and how much it really costs to make and sell?

Ladies and gentlemen, let's talk profit margin. Profit margin is the difference between how much it costs a company to manufacture, transport and sell its products, and how much it sells them for. If a company made $10 million in profit of sales of $100 million, the profit margin is 10%. You get that number by dividing the profit ($10 million) by the income ($100 million). Usually you'll hear profit margin as a percentage.

The profit margin is a great way to tell how well a company is run. If you have a high profit margin in a company, that means that the company's costs to make the product are low and it can withstand changes in price fairly well. Also you can use profit margin to tell how well a company is run when you look at similar companies.

Let's say you were looking a two candy companies. One has a profit margin of 15%, off $200 million in sales. The other company has a profit margin of 7% off $400 million in sales. The $400 million candy company's profit margin shows the company is having trouble keeping costs down. It might be spending too much money on their CEO's private jet, or their sugar suppliers aren't as good as they could be. Anyway, if investors were looking at the $400 million candy company, they would be asking some serious questions.