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Net margin is usually expressed as a percentage.  It is calculated by dividing net profit by total revenue, and represents how much of each dollar of revenue earned results in net profit for the business.  Therefore, if the net margin is 12%, every dollar the business earns generates 12 cents net profit.

Net margin varies by industry and business.  A business with a low net margin can still be a good investment, especially if it earns a lot of revenue.  A $1 billion business with a net margin of 5% earns more money ($5 million) than a $10 million business with a 25% net margin ($2.5 million).

Net margin is a very good indicator as to how efficiently managers operate a company.  This is because of the factors that comprise the net profit part of the net margin formula.

For instance, Beta Corp has the following income statement:

Beta Corp Income Statement

 

Normal

More Efficient

Gross Sales

5,000,000

5,000,000

Cost of Good Sold

-2,500,000

-2,500,000

Gross Margin

3,000,000

3,000,000

Less:

 

 

Operating Expenses

-2,000,000

-1,500,000

Net Profit

1,000,000

1,500,000

 Net Margin

20%

30%

Based on the numbers in the normal column, Beta Corp has a net margin of 20%.  However, if Beta Corp reduces operating expenses by $500,000 by doing things such as cutting salaries, reducing the rent expense and cutting down on travel and entertainment expenses, there will still be $5 million in revenue, but an increase in net margin from 25% to 30%. 

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