Also known as net profit margin. This figure is a measure of profitability. It is equal to annual net income divided by revenues from the same period. The resulting figure is then multiplied by 100.
Benefit
This figure is a useful snapshot of how profitable a company was in a given year, but it should always be looked at in the context of net margin figures for previous years and for the trailing twelve months.
Origin
The company’s net income and revenues are found in the income statement of its annual report and recent 10-Qs.
For the Pros
Net margin is one of the three ratios used in the calculation of return on equity (ROE), which is a measure of a company’s profitability. Asset turnover (sales/assets) and financial leverage (assets/equity) are the other two. Multiplying the three ratios together produces ROE, and raising any one of the three ratios will increase ROE. Net margin and asset turnover are measures of how efficient a company’s operations are, while financial leverage is a measure of how much debt the company carries.