Company's Financial Accounting
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Net Margin: Business's Profitability
DEFINITION:
Net margin (net profit margin; in Finnish, nettomarginaali, nettovoittomarginaali) is an indicator that allows to:
- analyze competitiveness, overall profitability and financial health of the business;
- assess if a company generates enough profit from its sales; how efficiently a company is managed;
- measure how much net income (or profits) is generated as a percentage of overall revenues received, in other words; estimate how much profit the business generated for each euro of sales;
- assess costs and pricing;
- compare companies in the same industry;
- evaluate investment risks;
- forecast future profitability.
FORMULAS for calculations:
\[ {Net \ Margin} = {Net\ Income \over Revenue} * 100 % \]
\[ {Net \ Margin} = {Net\ Profit \over Net\ Sales} * 100 % \]
WHERE:
- Net Income = Net Profit = Revenue – COGS (Cost of Goods Sold) – Operating Expenses – Interest – Taxes
Ratio is usually expressed as a percentage but sometimes may be represented in decimal number.
RESULT INTERPRETATION:
- The higher the net margin, the better. High metric indicates more efficient company's operations.
- Long term trend of the expanding net margin is a good indicator.
- The company's expanding net margins often positively influence the share price growth.
- Declining margin might mean increased competition or rising expenses relative to revenues.
- Note: net margins might change considerably between industries.
EXAMPLE:
A company's net profit margin is equal to 35%:
Thus, company earns 35 cents of profit for each euro of sales revenue. This is the amount that the company can pay back to the shareholders or to reinvest in the business.