Net Profit Margin

RECENT NEWS
Penny Sleuth  Feb 18  Comment 
When looking at potential investments, one of the keys is finding companies with profitability.  Companies that consistently grow their profits have the best chance to grow in share price… today we are going to put net profit margin to...




RELATED WIKI ARTICLES
 
TOP CONTRIBUTORS

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 ÷ 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

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

  1. http://en.wikipedia.org/wiki/Profit_margin
  2. http://www.investopedia.com/terms/p/profitmargin.asp
Wikinvest © 2006, 2007, 2008, 2009, 2010, 2011, 2012. Use of this site is subject to express Terms of Service, Privacy Policy, and Disclaimer. By continuing past this page, you agree to abide by these terms. Any information provided by Wikinvest, including but not limited to company data, competitors, business analysis, market share, sales revenues and other operating metrics, earnings call analysis, conference call transcripts, industry information, or price targets should not be construed as research, trading tips or recommendations, or investment advice and is provided with no warrants as to its accuracy. Stock market data, including US and International equity symbols, stock quotes, share prices, earnings ratios, and other fundamental data is provided by data partners. Stock market quotes delayed at least 15 minutes for NASDAQ, 20 mins for NYSE and AMEX. Market data by Xignite. See data providers for more details. Company names, products, services and branding cited herein may be trademarks or registered trademarks of their respective owners. The use of trademarks or service marks of another is not a representation that the other is affiliated with, sponsors, is sponsored by, endorses, or is endorsed by Wikinvest.
Powered by MediaWiki