# Net Profit Margin

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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...

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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.