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. The net profit margin begins — unsurprisingly — with net profit: the amount of money you have left over after you subtract all expenses from your revenue. Net Profit Margin Ratio indicates the proportion of sales revenue that translates into net profit. Notice that in terms of dollar amount, net income is higher in Year 2. Interpretation & Analysis. Net Profit Margin ratio is a key performance indicator of … The profit margin ratio, also called the return on sales ratio or gross profit ratio, is a profitability ratio that measures the amount of net income earned with each dollar of sales generated by comparing the net income and net sales of a company. It represents the proportion of sales that is left over after all relevant expenses have been adjusted. To generate the profit margin, you compare this number to the net sales, the amount of money you brought in over the period. 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. Interpreting the Net Profit Margin. 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 is a percentage of sales, not an absolute number. Example of Net Profit Margin. Thus, its net profit margin is: ($20,000 net profit ÷ $160,000 net sales) x 100 = 12.5% 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. The net profit margin declined in Year 2. 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 often used to compare companies within the same industry in a process known as "margin analysis." In 2018, the gross margin is 62%, the sum of $50,907 divided by $82,108. Below is the snapshot of Colgate’s Income Statement from 2007 to 2015. Terms Similar to Net Profit Margin. 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. Net Profit Margin = Net Income / Revenue x 100 . Net profit margin is used to compare profitability of competitors in the same industry. Nonetheless, it represents only 7.0% of sales; while in Year 1, it represents 10.5%. Net profit margin tells you how well a company is able to achieve profits from sales (as well as manage its operating expenses). Operating Profit Margin formula = Operating Profit / Net Sales * 100; Or, Operating Margin = $170,000 / $510,000 * 100 = 1/3 * 100 = 33.33%. 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