Also called the return on sales ratio, it shows the after-tax profit (net income) generated by each sales dollar by measuring the percentage of sales revenue retained by your company after operating expenses, creditor interest expenses and income taxes have been paid.
Typically, a company with a higher profit margin than its competitor is usually more efficient, flexible and able to take on new opportunities. Keep in mind that your net profit margin is used not only to evaluate the financial viability of your business, but also to compare your business to others in your industry. For instance, your business may have experienced a downturn in its net profit margin of 10% over the last three years, which may seem worrying. However, if your competitors have experienced an average downturn of 21%, your business is performing relatively well. Nonetheless, you will still need to analyze the underlying data to establish the cause of the downturn and create solutions for improvement.
How to calculate the net profit margin:
Net profit after taxes
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