Net Margin

Net Margin is a profitability ratio calculated as after-tax net income divided by sales. The ratio shows the amount of each sales dollar left over after all expenses have been paid.  Net Margin is generally quoted as a percentage.

Net Margin

Net Margin is a profitability ratio calculated as after-tax net income (or net profits) divided by sales (or revenue). The ratio shows the amount of each sales dollar left over after all expenses have been paid.  Net Margin is generally quoted as a percentage. Net Margin is also called Net Profit Margin or Return on Revenue.
 

 

Net Margin Formula

The traditional formula for Net Profit Margin divides the after tax net profit by revenue.



 Net Profit Margin formula: Net Profit* / Revenue


However some financial analysts prefer to see the net margin before payout to minority owners.  The resulting formula is:

Alternate formula for Net Profit Margin:  (Net Profit + Minority Interest + Tax-Adjusted Interest) / Revenue

 

Interpretation of Net Margin

Net profit margin is a key profitability ratio, useful when comparing companies in similar industries. A higher net profit margin means that a company is more efficient at converting sales into actual profit.



Low profit margins may represent a pricing strategy. Retailers and other some other businesses are known for their low-cost, high-volume approach. A low net profit margin may also represent a price war.

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