Net margin equals net profit divided by revenue
Net margin is the ratio of net profits to revenues for a company and is often used as an indicator of a company's ability to control its costs. In other words, how much of a profit does the company generate for every dollar it takes in. The formula for calcluating net margin is:
Net Margin = Net Profit / Revenues
Net margins vary from company to company with individual industries having typically expected ranges given similar constraints within the industry. For example, a retail company might be expected to have low net margins while a technology company could generate margins of 15-20% or more. A good way to determine which industries are most profitable is to compare net margins across industries.
Companies that increase their net margins over time generally see their share price rise over time as well as the company is increasing the rate at which it turns dollars earned into profits.
Examples
- Company XYZ generated $1 million in net profit on $ 10 million in revenues for a net margin of 10% in 2007 (1 / 10).
- In 2008, the company worked to become more efficient. Despite constant revenues in 2008 of $10 million, the company generated $1.3 million in net profit for a net margin of 13% in 2008. The company saw its share price rise as it used its resources more efficiently.
