What Is a Net Profit Margin?

The net profit margin refers to the percentage of net profit from sales, or the percentage of invested capital. This percentage can comprehensively reflect the operating efficiency of an enterprise or an industry. In accounting, profit can be divided into gross profit (the difference between the amount of goods sold and the cost of goods sold), operating profit (the difference between gross profit and operating expenses), and net profit (the difference between operating profit and income tax) difference). Profits vary from period to period, industry to industry, and business to business. In higher-profit enterprises, employees can get higher wages and bonuses. From the level of profit, we can predict the development trend of the economy. As profits increase, employment and income will generally increase, while profit declines, and employment and income will decrease accordingly. Profits encourage people to invest their savings in profitable businesses or industries. At the same time, profits also provide the largest source of funding for economic growth. Although the absolute value of profit may reach new levels every year, the profit margin may not necessarily continue to increase with it. ^[1]

Net profit rate

The net profit margin refers to the percentage of net profit from sales, or the percentage of invested capital. This percentage can comprehensively reflect the operating efficiency of an enterprise or an industry. In accounting, profit can be divided into gross profit (the difference between the amount of goods sold and the cost of goods sold), operating profit (the difference between gross profit and operating expenses), and net profit (the difference between operating profit and income tax) difference). Profits vary from period to period, industry to industry, and business to business. In higher-profit enterprises, employees can get higher wages and bonuses. From the level of profit, we can predict the development trend of the economy. As profits increase, employment and income will generally increase, while profit declines, and employment and income will decrease accordingly. Profits encourage people to invest their savings in profitable businesses or industries. At the same time, profits also provide the largest source of funding for economic growth. Although the absolute value of profit may reach new levels every year, the profit margin may not necessarily continue to increase with it. ^[1]

Corporate income tax rates are statutory. The higher the income tax rate, the lower the net profit. China now has two types of income tax rates. One is the general enterprise income tax rate of 25%, that is, 25% of the total profit must be submitted to the state finance as tax; the other is the preferential tax rate for foreign-funded enterprises and some high-tech enterprises. The rate is 15%. When the operating conditions of enterprises are comparable, the operating efficiency of enterprises with lower income tax rates will be better.

for example:

For example, an electrical appliance store has an annual operating income of 40 million yuan. This year, 20,000 home appliances were sold. The average purchase price of each home appliance was 1,500 yuan. The annual salary of employees was 1 million yuan. 4 million yuan, the business tax rate is 3%, then the total cost of this appliance store for one year is:

Business tax = turnover × business tax rate = 4000 × 3% = 120 (ten thousand yuan) (generally this industry pays VAT)

The total profit of this appliance store is:

When the income tax rate is 25%, its net profit is:

Net profit = total profit × (1-income tax rate) = (4000-2 * 1500-100-400-120) × (1-25%)

= 380 × (1-25%) = 285 (ten thousand yuan)

When the income tax rate is 15%, its net profit is:

380 × (1-15%) = 323 (ten thousand yuan) Obviously, when the income tax rate is low, the profit of the enterprise is large. For the same company, its after-tax profit is 26.84% higher than the 25% income tax rate when enjoying the 15% income tax rate.

Focusing only on the increase or decrease in the absolute amount of net profit is not sufficient to reflect changes in the company's profitability. It also needs to be combined with changes in main business income. For example, if the growth rate of main business income is faster than the growth rate of net profit, the company's net profit margin will decrease, indicating that the company's profitability is decreasing. On the contrary, if the net profit growth is faster than income, the net profit rate will increase, indicating that The company's profitability is increasing. Therefore, net profit ratio is more telling than net profit. However, if there are a large number of non-recurring gains and losses, non-main income, and income tax changes in the net profit, the quality of such net profit margins will decline and it will not fully reflect the profitability of the company's business. At this time, the operating profit margin or EBITDA profit margin will be Better indicators.