Net Profit Margin interpretation
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 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.
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