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The net profit margin calculator allows you to work out a simple and intuitive measure of a company's profitability in relation to its total revenues. It's a straightforward way to determine how large is the profit generated by a single dollar of sales. Business owners, investors, and shareholders generally prefer a higher net profit margin ratio (also called "net income margin"), as it indicates the overall financial health of a company, and informs you if its business model is effective and sustainable.
The net profit margin is one of the basic profitability ratios you can find in financial analytics. It's often used to complement well-known efficiency measures that rely on asset or equity values. Unlike these indexes, the net profit margin compares net income to total revenue. This indicator is based on the idea that each sale a company makes translates into revenue. Revenues, in turn, are converted into income. The net profit margin formula may approximate the efficiency of this process.
However, the net profit margin is not merely the amount of cash left in the company after all of the costs (e.g., salaries, utilities, or depreciation) are covered. That's the gross profit margin. In order to get your hands on the net profit, you have to take into account all of the operating expenses, interest expenses, and taxes.
Net profit margin formula is also a convenient way to warn you if there's something wrong with a company. If you notice a consistent downward trend in this index, maybe it's time to ask if there's something bad going on? Are expenses misdirected? Investments unproductive? Maybe it's just poor customer service?
Unless the profit of a company is negative (i.e., it generates a loss), the net profit margin formula should produce a value from 0% to 100%. In practice, it's often hard to find estimates larger than 30%. You may be tempted to think that the higher your net profit margin, the better for you. Most of the time, you will be right. Keep in mind, however, that typical values of this indicator depend on the type of business your in, as well as the overall shape of the economy. If your company faces fierce competition, your net profit margin will probably be lower compared to a situation when you're a sole supplier to the market. Consequently, the desirable values of this indicator are entirely relative. It's also a good idea to compare profitability measures to liquidity indicators, such as the current ratio, to get a broader picture of a company's financial stance.
Also, net income margin of different enterprises varies significantly across industries. For example, information services in the U.S. reveal on average a fairly high net profit margin ratio of about 13.4%. At the same time, the shipbuilding industry is characterized by a negative value of this indicator, -1.8%. You can check out this great database on margins by sectors prepared by Aswath Damodaran of the Stern School of Business at New York University to see what's an average net profit margin ratio in various sectors of the U.S. economy.
Long-term trends in net profit margin are also crucial for average rates of growth in the economy. They are used to identify sectors that efficiently convert sales revenues into profits, forecast the dynamics of each sector, and assess investment opportunities. No wonder this indicator is closely followed by investors who try to adjust their portfolios and maximize returns.
On the other hand, if you want to measure not exactly net profitability or the return to equity but to measure operational profitability, you can use the return in capital employed calculator. A high ROCE among its peers and a growing ROCE is what every investor should be looking for.
Finally, another factor of utmost importance, aside from profitability, is the price at which you buy the investment. In order the verify if you are overpaying for a business or not, please try our discounted cash flow calculator. Remember, the less your pay for a business, the less risk you face.
