Net Profit Margin Ratio

The Net Profit Margin Ratio or net margin is used to determine a company’s profitability. It determines how much they keep for every dollar that they sell. The formula looks like this

( Net Renvenue After Taxes) / (Net Sales)

This number is often expressed as a percentage. So if the net margin was 30% that would mean the company keeps 30% of the profit that they sell. This due to taxes and other expenses a firm might incounter.

The higher the number is the better investment the company is supposet to be.

It is important to compaire this number to other companies in the same industry group in order to get a more accurate picture. For example some industries that have lots of competing companies will have low net profit margins. While other industries with less compation will be higher on average.

It is important to compare this number to other companies in the same industry group in order to get a more accurate picture. For example some industries that have lots of competing companies will have low net profit margins, while other industries with less competition will be higher on average.

The reason companies with more competition will have a lower ratio is because they will normally be forced to lower their prices to stay competitive in the marketplace.

Other factors may also influence a given industry’s ratio. If it takes a lot of money to make a product then they might have a low ratio because they might not be able to sell it for a lot more then they produced it. If it is cheap to produce and in demand then the company might have a high ratio, because they get a lot out of it for little cost.

Other Financial Ratios

Using other ratios in combination with this one can give you a good idea of how strong a company is.

Quick Ratio - This looks at a company’s short term liquidity

Gross Profit Margin - This measures a company’s revenue taking into consideration cost of goods sold

Vertical Analysis and Horizontal Analysis – 2 Ways to Analyze a company

Return From Net Profit Margin Ratio to Fundamental Analysis