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%.
[edit] Implications and Usage
[edit] 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.
[edit] 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. Also, let's say that in 2006, it made $12mm in Net Income and $88mm 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.
[edit] References
- http://en.wikipedia.org/wiki/Profit_margin
- http://www.investopedia.com/terms/p/profitmargin.asp
Net Profit Margin
Edit Metric
Edit
History
Bookmark
