Net Profit Margin = Net Income / Revenue x 100 . Colgate’s Operating Profit = EBIT / Net Sales. Companies may have a high PAT margin because they may be highly profitable at the Operating profit margin level itself, resulting in a high Net margin. Net Profit Margin = 3578.11 120229.82 x 100 = 2.97% Interpretation: The company receives a profit of 2.9% after paying the taxes. Nonetheless, it represents only 7.0% of sales; while in Year 1, it represents 10.5%. Notice that in terms of dollar amount, net income is higher in Year 2. Colgate Example. The ratio is considered as okay so it shows that the company is good at changing sales into profit but still the company need to work on its sales and inventories. Net profit margin tells you how well a company is able to achieve profits from sales (as well as manage its operating expenses). Net profit margin is a percentage of sales, not an absolute number. To generate the profit margin, you compare this number to the net sales, the amount of money you brought in over the period. Thus, its net profit margin is: ($20,000 net profit ÷ $160,000 net sales) x 100 = 12.5% net profit margin. Net profit margin (Y1) = 98 / 936 = 10.5% Net profit margin (Y2) = 103 / 1,468 = 7.0%. Example of Net Profit Margin. Operating Profit Margin formula = Operating Profit / Net Sales * 100; Or, Operating Margin = $170,000 / $510,000 * 100 = 1/3 * 100 = 33.33%. Net profit margin is often used to compare companies within the same industry in a process known as "margin analysis." When a company’s profit margin ratio is low, it’s usually an indication that a firm’s management has allowed expenses to climb too high. As you can see in the above example, the difference between gross vs net is quite large. The net profit ratio can be viewed as a gauge of both business efficiency and profitability. Terms Similar to Net Profit Margin. The net margin, by contrast, is only 14.8%, the sum of $12,124 of net income divided by $82,108 in … For example, a net profit margin of 35% means that every $1 sale contributes 35 cents towards the net profits of the business. Net profit margin is used to compare profitability of competitors in the same industry. Net Profit Margin Interpretation High Net Profit Margin. If we have a high Net margin, it clearly indicates the company is making high after-tax profits on each dollar of Sales. Net Profit Margin Ratio indicates the proportion of sales revenue that translates into net profit. Net Profit Margin ratio is a key performance indicator of … Net profit margin (also called profit margin) is the most basic profitability ratio that measures the percentage of net income of an entity to its net sales. Below is the snapshot of Colgate’s Income Statement from 2007 to 2015. During that time, it had sales of $160,000. In 2018, the gross margin is 62%, the sum of $50,907 divided by $82,108. 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