Skip to main content

Ratio Analysis - Net Profit Margin

First some basic profitability equations:

Net Profit Margin = Net Profit * 100 = Profit before Interest and Taxation * 100
Turnover Turnover

Remember:

Net Profit = Gross Profit - Expenses

Why do we have two versions of this ratio - one for net profit and the other for profit before interest and taxation? Well, in some cases, you will find they use the term net profit and in other cases, especially published accounts, they use profit before interest and taxation. They both mean the same: look back at the financial statements for Tesco where we compared different names for the same things.

The net profit margin ratio tells us the amount of net profit per £1 of turnover a business has earned. That is, after taking account of the cost of sales, the administration costs, the selling and distributions costs and all other costs, the net profit is the profit that is left, out of which they will pay interest, tax, dividends and so on.

Here are a few examples of the net profit margins from the same businesses we saw in the gross profit margin section:

Leisure & HotelsInternational AirlineManufacturerRetailerDiscount AirlineRefiningPizza RestaurantsAccounting Software
Net Profit7.36%4.05%-10.48%1.63%10.87%12.63%7.55%27.15%

Just like the gross profit margins, the net profit margins also vary from business to business and from industry to industry. When we compare the gross and the net profit margins we can gain a good impression of their non-production and non-direct costs such as administration, marketing and finance costs.

We saw that the international airline's gross profit margin was the lowest of this group of eight businesses at only 5.62%; but look, its net profit margin is 4.05%, only a little bit lower than its gross profit margin. On the other hand, the discount airline's gross profit margin is 27.46% but its net profit margin is a lot less than that at 10.87%. As we just said, these comparisons give us a great insight into the cost structure of these businesses.

Look at the software business too, a very high gross profit margin of 89.55% but a net profit margin of 27.15%. This is still high, but we can now see that the administration and similar expenses are very high whilst its cost of sales and operating costs are relatively very low.


Source:
http://www.bized.co.uk/

Comments

Popular posts from this blog

Interactive Worksheet: The Accounting Equation

by Ken Delaney-Moore, Sheffield Hallam University Aims: This worksheet deals with: The accounting equation. The accounting concepts of 'business entity' and 'dual aspect'. The effects of transactions on the balance sheet. After having completed the worksheet you should be better able to perform to syllabus specifications relating to these points. When you are done, please fill-in the on-line evaluation form in order for us to monitor the quality of the materials we provide for you. Tell us what we're doing right and wrong. It takes very little time, and your opinions are valued - thank you. A business start-up Imagine that 'Jim Sayers' puts £5,000 of his personal savings into a business bank accoun...

MEMBUAT DATABASE APLIKASI AKUNTANSI DENGAN MICROSOFT ACCESS 2007

Microsoft Office Access 2007 merupakan aplikasi pembuatan database yang diciptakan Raksasa Microsoft Corporation, Hingga saat ini banyak sekali perusahaan menggunakan aplikasi ini dalam membuat database untuk keperluan bisnisnya, baik dengan menggunakan 100% access, maupun dengan memanfaatkan enginenya dan menggabungkan dengan aplikasi visual lainnya seperti Visual Basic, dsb. Access 2007 merupakan dipenyempurnaan dari access 2003. Berikut ini kita akan mencoba membuat database sederhana untuk keperluan akuntansi. Untuk membuat aplikasi database akuntansi tentu diperlukan banyak tabel, query, dan report yang harus dipersiapkan. Apalagi jika akuntansi untuk perusahaan dagang, dan manufaktur. Untuk lebih memudahkan bagi pemula yang ingin belajar membuat aplikasi dengan menggunakan Microsoft office access 2007, maka disini saya akan mencoba membahas aplikasi database akuntansi sederhana untuk perusahaan jasa. dalam menyusun suatu database tentu sebelumnya kita harus menyusun normalisas...

The Current Ratio

The Current Ratio The current ratio is also known as the working capital ratio and is normally presented as a real ratio. That is, the working capital ratio looks like this: Current Assets: Current Liabilities = x: y eg 1.75: 1 The Carphone Warehouse is our business of choice, so here is the information to help us work out its current ratio. Consolidated Balance Sheet 31 March 2001 25 March 2000 £'000 £'000 Total Current Assets 315,528 171,160 Creditors: Amounts falling due within one year 222,348 173,820 As we saw in the brief review of accounts section with Tesco's financial statements, the phrase current liabilities is the same as Creditors: Amounts falling due within one year . Here's the table to fill in. OK, so we've done this one for you! Current Ratio For the Carphone Warehouse 31 March 2001 Current Assets: Current Liabilities 315,528: 222,348 1.42: 1 25 March 2000 Current Assets: Current Liabilities 171,160: 173,820 0.98: 1 Math...