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Definition

Net margin - also known as net profit margin is the ratio of Net Income divided by net sales or Revenue, usually presented in percent. It is calculated as

Net Margin
= Net Income / Revenue
= (Revenue - Cost of Goods Sold - Selling, General, & Admin. Expense - Research & Development - Depreciation, Depletion and Amortization - Interest Expense - Non-Recurring Items - Tax Expense) / Revenue

Formula

Net Margin = (Revenue - Cost of Goods Sold - Selling, General, & Admin. Expense - Research & Development - Depreciation, Depletion and Amortization - Interest Expense - Non-Recurring Items - Tax Expense) / Revenue

Explanation

Although Net Income and Earnings-per-Share (EPS) are the most widely used parameter in measuring a company’s profitability and valuation, it is the least reliable. The reason is that reported earnings can be manipulated easily by adjusting any numbers such as Depreciation, Depletion and Amotorization and non-recurring items.

But the long term trend of the net margin is a good indicator of the competitiveness and health of the business.

Related Terms

Revenue, Cost of Goods Sold, Selling, General, & Admin. Expense, Research & Development, Depreciation, Depletion and Amortization, Interest Expense,Non-Recurring Items, Tax Expense, Net Income

Financial Dictionary

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