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Profit Margin

Profit margin or net profit ratio are used to a measure profitability. It can be calculated as,


Profit Margin



For example, if stock ABC reported net profit of $180 million with $500 million in revenue, the profits margin equals to 36 per cent.

Company with higher net profit ratio needs to invest less capital back into business to make money because they can make use of the profits they made. Besides, high profits margin have pricing flexibility and cushion against recession.

More importantly, its high margin indicate the company has efficient management in controlling expenses , which then to increase earnings.

These companies are normally thrifty as they seek to maximise returns by:

  • not buying themselves glamorous office addreses
  • not reward its management with fat salaries and bonuses which do not reflected with business performance
  • not buy corporate private jet without any good reason
  • not just changing an old companies to something sexy.
Profits margin can differ from one industry to another. Therefore, you must compare it to its peers within the same field.

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Related Financial Ratio

Return on Equity (ROE), Debt to Equity Ratio (D/E),
Earnings Per Share Growth Rate (EPSGR), Earnings Per Share (EPS), Price to Earnings Ratio (PER)

Efficiency Ratio, Liquidity Ratio, Leverage Ratio, Profitability Ratio,

 




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