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Net Profit Margin |
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| - | 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. |
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Revision as of 11:38, February 2, 2011
| This article is part of WikiProject Definitions. Consider editing to improve it. View articles referencing this definition. |
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,
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%.
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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.
References
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