Net profit margin is a percentage in terms of how much net profit is generated from each dollar of revenue.
Net profit margin = Net income / Revenue x 100
If a company increases its earnings, that is good. The next thing you need to identify is whether or not a company can maintain that profit margin. A company can increase revenue and earnings by undercutting the competitors , but that is not profitable for the shareholders. The company cannot do that for the long term.
What is the Company’s Net Profit Margin for the Last 10 Years? Does the Company generate a Consistent Upward-Trend Profit Margin or at least maintain an average profit margin?
What is the Company’s Gross Profit Margin for the Last 10 Years? Does it consistently grow, or at least maintain an average rate?
A gross profit is how much money is left after the cost of goods sold is subtracted from the revenue numbers.
Gross Profit = Revenue – Cost of Goods sold
Gross Profit Margin = Gross Profit / Revenue
Inventors need to look for companies with higher gross profit margins. Sustainable competitive businesses have a higher percentage of gross margins when compared with competitive industry companies.
Does the Company have a high pretax profit margin?
Pretax income is calculated after interest expenses,and deducted from the earnings before interest and taxes and before income taxes are paid. Calculate pretax income will give you the true picture. Always look for companies with high pretax profit margins. When a company posts a higher pretax profit margin, it can invest that income for business expansion, acquiring new businesses, paying dividends, or buying back shares.