# Net Profit Margin

 Revision as of 11:07, February 2, 2011 (edit)72.252.141.199 (Talk) (โSingle Company Comparisons)โ Previous diff Revision as of 11:38, February 2, 2011 (edit) (undo)Thesteffis - Director (Talk | contribs) Next diff โ Line 15: Line 15: ===Single Company Comparisons=== ===Single Company Comparisons=== - Keeping with A, let's say that it was 2007 in which it made \$383 500 in Net Income and \$779 500 in Revenues. + Keeping with A, let's say that it was 2007 in which it made \$15mm in Net Income and \$100mm in Revenues. {| class="wikitable" {| class="wikitable"

## Revision as of 11:38, February 2, 2011

This article discusses net profit margin. For other commonly used margins, see Profit margins

Net Profit margin is a key method of measuring profitability. It can be interpreted as the amount of money the company gets to keep for every dollar of revenue. That is,

Net Profit Margin = Net Income รท Net Sales.

Example: Company A has \$100mm in Sales and, after all expenses are accounted for, records a Net Income of \$15mm. Then Company A's profit margin is \$15mm/\$100mm = 15%.

## Implications and Usage

### Comparisons With Other Companies

Profit margins can be useful metrics, but typically require some specific circumstances to really have significance. Suppose we have Company A from above (15% profit margins) and Company B (with 20% profit margins). If A and B are in the same industry and, indeed, are competitors, then B may be a more intelligent investment.

If, however, companies A and B are not in the same space, then the differences in profit margins may not be so insightful. Suppose A is in an industry where profit margins are typically less than 10%, and B is in an industry where margins are typically greater than 25%, then A is probably a higher quality candidate.

### Single Company Comparisons

Keeping with A, let's say that it was 2007 in which it made \$15mm in Net Income and \$100mm in Revenues.

 A 2007 2006 Revenues \$100mm \$88mm Net Income \$15mm \$12mm Profit Margin 15% 13.63%

This shows that A generated even more revenue per dollar of expenses, resulting in a greater profit margin. This could be indicative of many things, including lower costs, higher prices, better management, increasing competitive advantage, etc. Though it's a useful tool, perform due diligence before relying on this metric.