After-Tax Profit Margin

What is 'After-Tax Profit Margin'

After-tax profit margin is a financial performance ratio, calculated by dividing net profit after taxes by revenue. A company's after-tax profit margin is important because it tells investors the percentage of money a company actually earns per dollar of revenue. For example, if someone owns a store and his net profit or net income after taxes is \$100,000, and his net sales are \$200,000, he has a 50% profit margin after taxes.

BREAKING DOWN 'After-Tax Profit Margin'

Often, a company's earnings don't tell the entire story. The amount of profit can increase, but that doesn't mean the company's profit margin is improving. For example, a company's sales could increase, but if costs also rise, that leads to a lower profit margin than the company had when it had lower profits. This is an indication that the company needs to better control its costs.

How Do After-Tax Profit Margins Work?

To illustrate, imagine that one year a company has \$200,000 in net profit after taxes after collecting \$300,000 in revenue, resulting in an after-tax profit margin of 66%. The following year, the company's net profit increases to \$300,000, and it has \$500,000 in revenue, yielding an after-tax profit margin of 60%. Although the company took in \$200,000 more in revenue and had a \$100,000 increase in profits, its margin shrunk. This means the company is making more money but also spending more for every dollar it earns.

In the first case, the company earns 66 cents in profit for every dollar it receives in revenue, but in the second case, it only earns 60 cents of profit for every dollar of revenue. To understand after-tax profit margins, you have to understand both net revenue and net profit.

What Is Net Revenue?

Net revenue, a key element of calculating after-tax profit revenue, consists of all of the money a company has taken in over a set period of time. It takes into account all of the revenue received by a company minus any returns or chargebacks. For a company that only sells products and services, net revenue is the same as net sales. However, many companies have multiple revenue streams, including interest, royalties, fees and donations.

What Is Net Profit?

Net profit, the other important figure when calculating after-tax profit margins, consists of all of the revenue a company has received minus the cost of goods sold and operating expenses. For example, imagine your company collects \$70,000 in revenue, spends \$20,000 on inventory, and then spends an additional \$20,000 on wages, rent, utilities and taxes. In this case, your net profit is \$30,000.