Net Profit Margin

Net Profit Margin Formula

What is Net Profit Margin and What Does Net Profit Margin Tell You?

The net profit margin is equal to the percentage of net income compared to the revenue of a company.

The average net profit margin can be different from each industry. So the investors can compare the net profit margin value with its industry value to get a clear picture of where the company standing in the industry.

By analyzing the variation of net profit margin, investors can forecast the growth of the profit. For this, investors can refer to previous company financial reports.

What does it mean by a high net profit margin?

A high net profit margin compared to its industry means that the company is profitable.

This indicate that company's earning is covering all of its costs like operation costs and taxes. So the investes can expect good future from investment on the comapay.

What does it mean by a low net profit margin?

If the company's net profit margin is comparatively low against the industry average, then the company's net profit is low. Due to that reason, investors might not interested in this company.

Buying shares of a company that has a low net profit margin is a considerable risk. For starters, this may be a huge risk for your money. So don’t go for such investments if not certain.

What does it mean by a negative net profit margin?

This indicates that the company is making losses during the period that the net profit margin calculated.

Buying shares of a company that has a negative net profit margin is a huge risk. For starters, this may be a huge risk for your money. So don’t go for such investments if not certain.

How to use net profit margin?

Usually, investors prefer to invest in shares with a high net profit margin compared to the industry. Apart from that, if the net profit margin is gradually increasing in the previous years, then that can be a plus point to choose shares of this company.

A high net profit margin means the company is generating profit than other companies in the industry. That is the reason for investors interested in this type of company.

Risk of using net profit margin and when not to use net profit margin

Sometimes net profit margin can be untrusted due to market conditions like temporal market demands, political reasons. Due to these unpredictable conditions, a company can gain huge profits temporarily. This doesn't mean that the company is going to be profitable as this forever.

This indicator is not the best indicator to understand the company's sales, revenue, cash flows, debts, etc.

So never take decisions by only looking at net profit margin. Always analyze as possible by considering different factors like other ratios and business news. Always try to use multiple ratios combinedly to get a more clear picture of a company.

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