Technicals Stability Returns




Understanding Net Margin


Net Margin is the company's Net Profit divided by the Total Revenue. This profitability metric indicates how much a net profit is generated for each rupee of revenue earned. In simple terms, it tells how much the company is generating profit for each rupee of revenue earned in percentage. It measures the company's profitability and management's capability to manage its expenses to generate profit.

Net Margin is also known as the Sales Ratio or Net Profit Margin. A high net margin indicates positive returns in the business, and the company is efficiently managing its expenses and converting its sales into a profit.

The formula to derive Net Margin

Net Margin


Net Profit - also known as Net Income or Bottom Line. It is a portion of the money that the company left after they subtract their total business expenses from their total revenue. Net profit is found at the bottom of the Income Statement.

Total Revenue - It indicates how much a company's revenue is before deducting any expenses. Total revenue is found in the company's Income Statement.

Example of Net Margin: For the financial year, Eicher Motors reported a Net Profit as Rs.1346.89 Cr., and Total Revenue as Rs. 8661.56 Cr.
The Net Margin as per formula (Net Margin = Net Profit/Total Revenue) x 100 is calculated as (1346.89/8661.56) x 100 = 15.55%.


Key Highlights
Net Margin is a profitability metric that indicates how much a net profit is generated for each rupee of revenue earned.

The higher net margin is considered good. It indicates the company's ability to convert its sales into a profit.

While doing analysis, always compare companies that operate in the same industry and also compare the data of current and previous years to understand the company's performance over the years.


While looking at Net Margin, the following points should also take into consideration:
A higher net margin is considered good. It indicates the company is efficiently managing its expenses and generating profits from its sales. The high net margin of the company can be a result of the company's sales being in high demand or the total expenses being low.

A net margin of 15% or higher is considered good. The 15% means that the company generated fifteen percent net profit compared to its revenue.

A low net margin indicates that the company's sales are less, or total expenses are very high, and the company is not managing its expenses efficiently.

Low net margin but continuous growing year-over-year of the particular company is a plus point while analyzing that company. It indicates that the company is improving its management efficiency and increasing its sales or decreasing its expenses.

Some investors choose to stay away from companies that have low net margins. And some look for low net margin companies, but they should have high revenue compared to their peers because they think that competitors of that company will face a tough time in stealing market shares from them.


How to use Net Margin effectively
Companies with high net margins of 15% or higher are usually considered good. This metric indicates the company's ability to convert its sales into a profit.

While doing analysis, always compare companies that operate in the same industry and also compare the data of current and previous years to understand the company's performance over the years.

Net margin is only a part of the strategy while analyzing companies fundamentals. For better analysis, we should check other financial metrics like EBITDA Margin, Operating Margin, EPS, Cash EPS, etc.,


Range Indicator of Net margin Ratio

Range Indicator Comments Screener at TSR
Above 30 Strong Bullish Extremely High Margin Yes
20 to 30 Bullish High Margin Yes
15 to 20 Mild Bullish Good Margin Yes
10 to 15 Neutral Average Margin Yes
5 to 10 Mild Bearish Low Margin Yes
0 to 5 Bearish Very Low Margin Yes
Below 0 Strong Bearish Extremely Low Margin Yes


Related Net Margin Screener
Profitability Screener Net Margin Above 50 Net Margin 25 to 50 Net Margin 15 to 25