Net Profit Margin Interpretation
What is Net Profit Margin
Net profit margin is a key financial indicator used to asses the profitability of a company.
Net profit margin formula is:
Net profit margin measures how much of each dollar earned by the company is translated into profits. A low profit margin indicates a low margin of safety: higher risk that a decline in sales will erase profits and result in a net loss.
Net Profit Margin Analysis
Net profit margin provides clues to the company's pricing policies, cost structure and production efficiency. Different strategies and product mix cause the net profit margin to vary among different companies.
Net profit margin is an indicator of how efficient a company is and how well it controls its costs. The higher the margin is, the more effective the company is in converting revenue into actual profit.
Net profit margin is mostly used to compare company's results over time. To compare net profit margin, even between companies in the same industry, might have little meaning. For example, if a company recently took a long-term loan to increase its production capacity, the net profit margin will significantly be reduced. That does not mean, necessarily, that the company is less efficient than other competitors.
Net profit margin calculator measures company's profitability or how much of each dollar earned by the company is translated into net profits. Net profit margin formula is:
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Definitions and terms used in Net Profit Margin Calculator
- Net Sales
- The amount of revenue generated by a company after the deduction of returns, allowances for damaged or missing goods and any discounts allowed.
- Net sales = Gross sales - Sales returns and allowances
- Cost of Goods Sold (COGS)
- The direct cost attributable to the production or purchasing of the goods sold by a company. It is also referred as Cost of sales.
- Gross Profit
- The difference between Net Sales and its Cost of Goods Sold, before deducting overhead, payroll, taxes, interest and other operating expenses.
- Gross profit = Net sales - Cost of Goods Sold
- Operating Expenses
- The expenses incurred by a business in its normal day-to-day operations, but not directly associated with production of goods. Operating expenses include payroll, sales commissions, employee benefits and pension contributions, transportation and travel, amortization and depreciation, rent, repairs etc. These expenses are divided into selling expenses and administrative and general expenses.
- Operating Income
- A measure of a company's profitability that excludes interest and income tax expenses. This is the surplus generated by operations and equals gross profit less all operating expenses.
- Also known as Earnings before Interest and Taxes - EBIT
- Operating Income = Gross profit - Operating Expenses
- Interest Expenses
- A fee paid on borrowed assets, the price paid for the use of borrowed money.
- Income tax
- The tax levied on the income of a company.