In this “What Is…?” series, we break down complex investment terms for folks who are just learning about investing.
Right now, let’s examine what the term “net profit margin” means.
So, What Is Net Profit Margin?
Similar to the gross profit margin, net profit margin is a profitability ratio that reveals how much net profit a company makes for every dollar of revenue it generates.
Net profit (also known as net income, net earnings, or bottom line) is what the company is left with after subtracting all expenses from its revenue.
Such expenses include staff costs, rental costs, advertising costs, research and development costs, and taxes.
Net Profit Margin Formula
Net profit margin can be calculated as follows:
Net Profit = Revenue – Total Expenses
Net Profit Margin = (Net Profit/Revenue) x 100%
If a company’s net profit margin is 20%, it means that for every dollar of revenue it makes, the firm is left with 20 cents in net profit.
Net profit margin can be used to compare a company with its competitors within the same industry.
A higher profit margin over its competitors equates to a more profitable company that has better control over its costs.
Calculating Net Profit Margin of a Listed Company
Let’s use VICOM Limited (SGX: WJP) as an example to understand how to calculate net profit margin.
For 2019, VICOM’s revenue was S$103.7 million and its net profit attributable to shareholders stood at S$28.4 million.
Therefore, its net profit margin for the year was around 27% [(S$28.4 million/S$103.7 million) x 100%].
So, there you have it…
Now that you have learnt how to calculate net profit margin, try the formula on your favourite company out there!
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Disclaimer: The information provided by Seedly serves as an educational piece and is not intended to be personalised investment advice. Readers should always do their own due diligence and consider their financial goals before investing in any stock. The writer has a vested interest in the company mentioned.