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When evaluating a company, look at both the operating profit margin and the net profit margin to obtain a more complete picture of a company’s overall profitability.

Operating Profit Margin

Investors and analysts use the operating profit margin to identify how well a company's price strategy works and how efficiently it is operating. The value resulting from the operating margin ratio calculation shows the amount of revenue that remains after costs of production and overhead and other operational expenses, such as wages and facility costs, have been paid.

A company's operating profit margin must be healthy to remain financially solvent and grow. Ultimately, the operating profit margin shows how effective a company is at managing its costs, so it provides an evaluation of the strength of a company's management. The margin is best evaluated over time and compared to those of competing firms. A higher operating profit margin means that the company is managing its costs well and earning more in revenue per dollar of sales.

Net Profit Margin

The net profit margin ratio shows how much a company earns and turns into profit per dollar. Though the net profit margin obviously varies from one company to the next, a certain range is generally typical within industries. A company's net profit margin is analyzed in terms of where it falls in relation to the industry average and to its closest competitors.

Publicly traded companies release reports on their net profit margins on a quarterly and annual basis. If a company can steadily increase its net profit margin over time, its share price is likely to increase as well due to the continuing increase in the company's profits.

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  1. Profit Margin

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  6. Profitability Ratios

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