net margin
Net income divided by revenue, expressing the percentage of revenue that becomes profit after all expenses, taxes, and costs.
Example
“With $50M in revenue and $5M in net income, the company had a 10% net margin.”
Memory Tip
NET margin = the BOTTOM LINE as a percentage. What's left after everything is paid.
Why It Matters
Net margin reveals how much profit a company actually keeps from each dollar of sales after paying all expenses and taxes. Understanding this metric helps you evaluate whether a business is genuinely profitable and efficient at converting sales into actual earnings, which is crucial when choosing companies to invest in or assessing the financial health of a business you own.
Common Misconception
Many people confuse high revenue with high profitability, assuming a company making billions in sales must be highly profitable. However, a company could have massive sales but a very low net margin if expenses are too high, meaning it keeps only a small percentage of each sale as actual profit.
In Practice
Consider two coffee shops: Shop A has annual revenue of 500,000 dollars with net income of 50,000 dollars, giving it a net margin of 10 percent. Shop B has annual revenue of 800,000 dollars but net income of only 40,000 dollars, giving it a net margin of 5 percent. Despite lower total sales, Shop A is more efficient and profitable because it converts a larger percentage of its revenue into profit.
Etymology
NET (after all deductions) MARGIN (profit percentage). The MARGIN of profit that's NET of all costs.
Common Misspellings
Small business accounting made simple
Related Terms
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See Also
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