Net Profit Margin = ROR
is a ratio that measures how much income is kept in a company as compared to the total revenue
Simply put i is a measure of profitability
For this reason, profite margin is best used for comparing companies within the same industry that have similar revenue numbers and business models
Net profit margin = Net income / Revenue
A ratio that measures how much income is kept in a company as compared to the total revenue
Looking at the earnings of a company often doesn’t tell the entire story. Increased earnings are good, but an increase does not mean that the profit margin of a company is improving. For instance, if a company has costs that have increased at a greater rate than sales, it leads to a lower profit margin. This is an indication that costs need to be under better control.
Imagine a company has a net income of $10 million from sales of $100 million, giving it a profit margin of 10% ($10 million/$100 million). If in the next year net income rises to $15 million on sales of $200 million, the company’s profit margin would fall to 7.5%. So while the company increased its net income, it has done so with diminishing profit margins.
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