Net Income Margin
Net income margin, also known as net profit margin or simply profit margin, is a profitability metric that illustrates the percentage of each dollar of revenue that a company keeps as profit after accounting for all costs, taxes, and expenses.
It’s calculated by dividing net income by total revenue and then multiplying the result by 100 to express it as a percentage. The formula is:
Net Income Margin = (Net Income / Total Revenue) * 100%
For example, if a company has a net income of 0,000 and total revenue of 0,000, its net income margin would be:
Net Income Margin = ($100,000 / $500,000) * 100% = 20%
This means that the company keeps 20 cents of each dollar of revenue as profit, after all expenses and taxes have been paid.
The net income margin is a useful ratio that allows for the comparison of profitability among companies of different sizes. It is particularly useful when comparing companies within the same industry. A higher net income margin indicates a more profitable company that has better control over its costs compared to other, lower-margin companies.
Example of Net Income Margin
Let’s create a hypothetical company called “TechTronics.”
Suppose that TechTronics, an electronics company, has annual revenues of $2,000,000. After accounting for all expenses, costs of goods sold, interest, taxes, etc., their net income for the year is $400,000.
We calculate the net income margin using the formula:
Net Income Margin = (Net Income / Total Revenue) * 100%
Substituting in the given values:
Net Income Margin = ($400,000 / $2,000,000) * 100% = 20%
This means that TechTronics keeps 20 cents of every dollar of revenue as profit, after all expenses and taxes have been paid. The net income margin of 20% is a measure of the financial health and profitability of the company.