Net Margin

This ratio helps to evaluate the whole effectiveness of the company and its ability to earn net income, which can be distributed to shareholder or held in the company for the growth and investments. Net income (or net profit) in the formula consists of all the costs that incur in the company. It is calculated when we deduct cost of goods sold, all the operating expenses, financial expenses of interest and taxes from revenue. Net margin ratio highly depends on the sector where the company is working. If we compare pharmaceutical sector and restaurant industry, of course pharmaceutical industry will be more profitable and will have higher net margin than the second one. We can compare only the companies from the same sector, if we want to have correct and adequate comparison. Every sector has its own average or "normal" level of this ratio, so comparing two companies from different sectors is useless.

It is possible, that some well-known company has lower ratio than other, not so well-known company in the same sector. It can happen, because bigger companies usually have some other activities, or are investing the money back to the business. It can also happen that smaller company might have higher profit than the larger one. All this is shown in the examples.

First of all, let's take the company that has the net income of one million Euros. All the expenses that it has are deducted already. Then we know that the sales of that company were ten million Euros, so the net margin is 10 %. For comparison let's take that there is another company that earned five million Euros, but the sales were 60 million Euros. For this company net margin is 8,3%, which is lower than for the first firm even if its revenues and earnings are higher. This ratio also depends on the size of the company very much, so to set some level for all companies in general is not worth.

If an investor wants to choose correctly according to this ratio, he should compare the companies that are in the same sector and are making similar products, i.e. two dairy product companies can be compared together. Similar activities point at the same part of the market and at the same customers, so net margin is showing company's abilities to compete and work profitable by using its resources effectively. The companies with higher net margin ratio is usually more attractive for investors, but there might be exceptions as well.

Net margin calculator and many other financial calculators can be found here: http://www.financialratioss.com/

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