What is After-Tax Profit Margin
After-tax profit margin is a financial performance ratio calculated by dividing net income by net sales. A company's after-tax profit margin is significant because it shows how well a company controls its costs. A high after-tax profit margin generally indicates that a company runs efficiently, providing more value, in the form of profits, to shareholders.
Understanding Profit Margin
BREAKING DOWN After-Tax Profit Margin
This financial measure also communicates how much income is earned per dollar of sales. The after-tax profit margin alone is not an exact measure of a company's performance or determinant of the effectiveness of its cost control measures. However, with other performance measures, it can accurately depict the overall health of a company. Some industries inevitably have considerable costs. As a result, their margins may be low. However, that does not equate to poor control of costs.
What Are Net Income and Net Sales?
In business, net income is the total income with the removal of taxes, expenses, and the costs of goods sold (COGS). It is often referred to as the "bottom line" because it is the last or bottom line item on an income statement. Expenses include wages, rent, advertising, insurance, et al. Costs of goods sold are the costs associated with the production of products. Such costs include, but are not exclusive to, raw materials, labor, and overhead.
Net sales, the other component for calculating after-tax profit margins, is the total amount of gross sales with the removal of returns, allowances, and discounts. Also factored in net sales are deductions for damaged, stolen, and missing products. The net sale is a good indicator of what a company expects to receive in sales for future periods. It is an essential factor in forecasting, and it can help identify inefficiencies in loss prevention.
How Do After-Tax Profit Margins Work?
Company A has a net income of $200,000 and $300,000 in sales revenue. Its after-tax profit margin is 66% ($200,000/$300,000). The following year, the company's net income increased to $300,000 and its sales revenues increase to $500,000. The new after-tax profit margin is 60%.
When the growth of net income is disproportionate to sales growth, the after-tax profit margin will change. In this case, it has decreased. To an investor or analyst, it appears that costs are not well controlled. Typically, this is an indicator that variable values are not well controlled.
In the first case, the company earns 66 cents in profit for every dollar it receives in revenue. However, in the second case, it makes only 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.