NET PROFIT MARGIN | Financial Ratios - YouTube

What is net profit margin? Net profit margin or  net margin is a business's net profit divided by  

its revenue it's a profitability ratio that  measures how much net profit a business is  

able to generate for each dollar of revenue earned  usually net profit margin is shown as a percentage  

so we can multiply this by 100. before we jump  into the example let's take a moment to refresh  

ourselves on a couple of things first profit we  can find profit in a business's income statement  

the financial report that summarizes its revenues  and expenses over a period of time profit is the  

financial gain generated in a business when its  revenues are bigger than its expenses but what is  

net profit? The problem with this income statement  is that businesses often have several different  

types of expenses to get a better understanding  of these costs we can expand it at the top we  

subtract the direct cost of sales which gets  us to gross profit then we remove all of the  

operating expenses like research and development  selling general and administrative expenses  

depreciation and amortization which leaves us with  operating profit then at the bottom we take away  

interest and tax to reach net profit also known  as the bottom line all right then so what is  

net profit margin? Net profit margin is net profit  divided by revenue it tells us how much net profit  

a business is able to generate for each dollar  of revenue earned it takes into consideration  

all of the businesses expenses that we can see  above the bottom line in the income statement  

that's the fundamental difference between net  profit margin versus the other margin ratios  

so let's have a crack at calculating net profit  margin this is the income statement for a tech  

company called MAD it summarizes their revenue  earned and expenses incurred over the past year  

how do we work out MAD's net profit margin?  We'll start with revenue MAD earned one billion dollars  

during the course of the year and on the  bottom line we can see that they generated  

120 million dollars in net profit after deducting  all of their expenses so MAD's net profit margin  

is 120 million dollars in net profit divided  by 1 billion dollars in revenue that means they  

generated 12 cents of net profit on each dollar of  revenue they earned which is 12% if we multiply by  

a hundred but before you click away let's make  some comparisons first we'll look into MAD's  

year on year movement in net profit margin these  are MAD's income statements for the last two years  

on the left we have the current year where  they generated 120 million dollars in net  

profit on one billion dollars of revenue a 12%  net profit margin which we worked out already  

and on the right we have the previous year  in which MAD generated 49 million dollars in  

net profit from 700 million dollars in revenue 49  million divided by 700 million is a seven percent  

net profit margin so year on year MAD managed  to improve their top line revenue by 300 million  

dollars and they were able to increase their net  profit margin by five percent this resulted in  

a huge 71 million dollar increase in their net  profit on the bottom line but how do they fare  

against similar businesses? Here are the current  year income statements for MAD and INLET a direct  

competitor in the same industry straight away  we can see that INLET earned much more revenue  

7.8 billion dollars they also managed 1 billion  872 million dollars in net profit but how does  

their net profit margin compare against MAD's 1.872  billion dollars divided by 7.8 billion dollars  

is 0.24 or 24 percent  which is significantly more than MAD's 12 percent  

so INLET is earning more revenue and they're  converting a higher proportion of that revenue  

into net profit what can cause a decrease in net  profit margin well we know the net profit margin  

is net profit divided by revenue in the income  statement we saw that net profit is equivalent to a  

business's operating profit less its interest and  tax expenses if we split out these fractions and  

divide operating profit by revenue then we can see  that net profit margin is the same as operating  

profit margin minus interest expenses divided  by revenue minus tax expenses divided by revenue  

so there are a few factors that could cause  a decreased net profit margin first the  

businesses operating margin could have decreased  alternatively the interest or tax expenses could  

have risen as a proportion of revenue what  causes an increase in net profit margin?  

well the equation is the same as before but we  can spin the arrows around operating profit margin  

could have increased which would flow through  and have a direct impact on net profit margin  

alternatively the businesses interest or tax  expenses might have dropped as a proportion of  

revenue earned thanks to all my channel members  for your generous contributions what financial  

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