Net income margin

Net income margin
See also
Combined Ratio Economic Value Added - EVA Plowback Ratio Payables turnover Return on sales Activity ratios Cost-income ratio Contribution margin ratio Adjusted ebitda

Net income margin known also as a net profit margin, is a rate which says about the percentage of business’ net income per every dollar of revenue in sales, after all expenses, including taxes having been deducted. In other words, the net profit margin is measure of a business success with respect to earnings on sales. The net income margin is most frequently used by managers and shareholders. Thanks to the rate, they are able to know what percentage of every sold dollar goes to profit.

Calculation of net income profit

The formula for calculation the net income margin is as a following:

Net income margin= net income ÷ sales

It is calculated by dividing the money that business posses after paying all expenses (including taxes) by the money earned from sales, before paying expenses.

Interpretation of net income profit's results

The higher rate, the better for the business. It will mean that the business is more profitable. The rate's high will also depends on business’ specific type. The rate od 1% for grocery store will be nothing unusual nevertheless, 10% margin for jewelry store would be considered as a low and unsatisfying. There is a recognition for:

• A high profit margin on income would ensure a fair return for the owners as well as allowing the company to withstand adverse economic conditions in case of a decrease in sales, an increase in production costs and a decrease in demand for the product.
• A low-income profit margin has opposite implications. However, a company with a low profit margin can get a high return on investment if it has a higher inventory turnover. The profit margin should therefore be assessed in relation to the turnover ratio. In this case net profit margin and the gross profit margin should be calculated together.The need to analyse mergers arises because two indicators can show different trends. For example, gross margin may show a significant increase over a period of time, but the net profit margin may resemble a fixed one, or it may not increase as fast as the gross margin, or it may actually reject it. This may be due to the fact that an increase in operating costs may behave incorrectly on an individual basis.

References

• Khan M, Jain P (2006), Management Accounting, Tata McGraw-Hill Education
• Kelly J (2012), The Neatest Little Guide to Stock Market Investing: Fifth Edition, Penguin
• Lee F.Ch, Lee C.J, Lee C.A (2000), Statistics for Business and Financial Economics, Tom 1,World Scientific
• Penner J.S (2013), Economics and Financial Management for Nurses and Nurse Leaders: Second Edition, Springer Publishing Company
• Pinson L (2008), Anatomy of a Business Plan: A Step-by-step Guide to Building the Business and Securing Your Company's Future, Aka Associates

Author: Angelika Załęska