Question

Explain net profit and net profit margin. How can you measure them? Why are these indicators important? Explain and give specific examples.

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Answer 1

Net profit margin is the ratio of net profits to revenues for a firm .Therefore it is expressed in percentage.

To further get into it we need to understand what is revenue and what is net profit for a company.

Finding the company's revenue is simple It consists of all the sales, receipts the business has collected through the period.

To find profits, We need to subtract operating expenses, cost of goods sold (COGS), interest and tax from revenue. If the business pays stock dividends to its shareholders, also subtract those payments from revenue when calculating profit, but common stock dividends is not taken into account.

Net profit margin makes it possible to compare the profitability of two or more firms as it is a percentage data.

For example, A firm has net after-tax profit of $50,000 and sales of $1,000,000. Its net profit margin is calculated as follows:

$50,000 Net profit ÷ $1,000,000 Sales = 5% Net profit margin.