Video:How to Calculate Net Profit Margin

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Transcript:How to Calculate Net Profit Margin

Definition of Net Profit Margin

The profit margin tells you how much profit a company makes for every $1 it generates in revenue or sales. Profit margins vary by industry, but all else being equal, the higher a company's profit margin compared to its competitors, the better.

Tips for Calculating Net Profit Margin

To calculate net profit margin, several financial books, sites, and resources tell an investor to take the after-tax net profit divided by sales. Some analysts prefer to add minority interest back into the equation, to give an idea of how much money the company made before paying out to minority "owners."

In some cases, lower profit margins represent a pricing strategy. Some businesses, especially retailers, may be known for their low-cost, high-volume approach. In other cases, a low net profit margin may represent a price war which is lowering profits, as was the case with the computer industry way back in 2000.

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