What the Net Profit Margin is All About
The Net Profit Margin Ratio represents the “bottom line” a company earns after all expenses, interest, and taxes. Earnings left over can be retained by the company or distributed to shareholders as dividends. Wall Street analysts keep a close eye on trends related to the net profit margin, as it is perhaps the single most important metric related to a company’s financial performance.
Explanation for a 3 Year Old
Your mommy and daddy give buy $20 worth of supplies to start a lemonade stand. After a long hard day selling lemonade, you have come home with $25, meaning you earned a total of $5. Your net profit margin is 20%. Not bad!
Formula: Net Income ÷ Revenue
Net Income represents the after-tax profits of a business and can be found at the bottom of the income statement. Revenue represents total sales and can be found at the top of the income statement.
Net Profit Margin Calculator
What is a Good Net Profit Margin for a Company?
Net profit margins for companies vary wildly between different industries. In order to determine whether a prifit margin is impressive, it is necessary to compare it against industry peers. Some pharmaceutical and research based companies operate deep into red (negative profit margin) while they are working on new products. Their investors allow this because there is a potential for windfall profits in the future.